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THE  CORPORATION  PROBLEM 


THl-    PUBLIC    PHASES    OF    CORPORATIONS,   THEIR    USES, 

ABUSES,  BENEFITS,  DANGERS,  WEALTH,  AND  POWER, 

WITH  A  DISCUSSION  OF  THE  SOCIAL,  INDUSTRIAL, 

ECONOMIC,  AND  POLITICAL  QUESTIONS  TO 

WHICH  THEY   HAVE  GIVEN  RISE 


WILLIAM  W.  COOK 

OF    THK    NHW    YORK    BAR,   AUTHOR  OF    "  A   TREATISE    ON   STOCK    AND   STOCK- 
HOLDERS  AND   GENEKAI.  CORPORATION    LAW  " 


G.  P.  PUTNAM'S  SONS 

NEW   YORK  LONDON 

«7   WEST  TWENTY-THIRD    ST.  S;     KIM;    WIILIAM     ST.,    STRAND 

i\H  $nickrrbochrr  prrss 
1893 


Copyright,  1891 

BY 

WILLIAM  A.  COOK 


Ebe  Iknicfterbocfeer  press,  Iftew  ^ovti 

Electrotyped,  Printed,  and  Bound  by 
G.  P.  Putnam's  Sons 


PREFACE. 


The  author,  in  the  course  of  the  preparation  of  a 
treatise  on  corporation  law,  became  famihar  with 
many  facts  and  principles  relative  to  corporations, 
which,  however,  did  not  come  within  the  scope  of  a 
work  on  law.  The  law  of  corporations  is  a  subject 
distinct  from  that  of  the  public  phases  and  business 
methods  of  corporations.  Accordingly  the  author 
separated  the  two,  and  having  completed  a  treatise 
on  the  former,  he  now  presents  a  book  on  the  latter. 

The  many  questions,  social,  political,  industrial, 
and  economic,  that  have  arisen  in,  connection  with 
corporations,  constitute  together  what  is  known  as 
"The  Corporation  Problem."  This  problem  em- 
braces the  uses,  abuses,  benefits,  dangers,  wealth, 
and  power  of  corporations,  and  no  attempt  has  been 
made  heretofore  to  consider  these  matters  collec- 
tively and  by  themselves.  The  task  has  proved 
somewhat  difficult,  and,  in  order  to  shed  as  much 
light  as  possible  on  the  subject,  frequent  quotations 
from  others  are  given  in  connection  with  the  text. 
If  the  work  results  in  awakening  a  more  general 
interest  in  those  topics  than  now  exists,  the  author's 
purpose  will  have  been  answered. 

No.  15  Wall  St.,   Nkw  Y«»kk. 
Jtiiie   I,    iSqi. 

iii 


CONTENTS. 


Introductory 


CHAPTER   I. 


CHAPTER   II. 


Various  Controversies  to  Which  Corporations 

Have  Given  Rise.  1 1 

Reduction  of  railroad  charges — "Watered"  stock  and 
bonds — Discrimination  between  individuals— Rebates  and 
secret  rates — Discrimination  between  towns — Charging 
more  for  a  short  than  for  a  long  haul — Discrimination  be- 
tween articles — Charging  what  the  traffic  will  bear — Free 
passes — *'  Pools" — Railroad  wars — Useless  paralleling  of 
railroads — Foreclosures  and  reorganizations — Stock  gamb- 
ling— "Strikes" — Frauds  on  stockholders  and  creditors — 
Municipal  aid  to  railroads — Limited  liability  of  stock- 
holders and  directors — Taxation  and  exemptions  from 
taxation — Incorporating  in  one  State  and  doing  all  busi- 
ness in  another  State — Special  charters — Exclusive  privi- 
leges and  monopolies — Political  corruption — The  remedy 

CHAPTER    III. 

Remedies  for  the  Railroad  Proble.m  .  .120 
Co-operative  or  profit-sharing  associations  and  railroad 
insurance  as  remedies — State  socialism  as  a  remedy — State 
ownership  of  railroads  as  a  remedy — Periodical  leasing  of 
franchises  by  the  State  as  a  remedy — State  regulation  cf 
railroads  as  a  remedy — Railroad  consolidation  as  a  remedy. 

V 


vi  CONTENTS. 


CHAPTER   IV. 


PAGE 


Corporations  as  the  Owners  of  Natural  Mo- 
nopolies   .....  .         .   182 

What  is  a  natural  monopoly  ? — Natural  monopolies  as  the 
source  of  great  fortunes — Remedies  of  the  public. 

CHAPTER   V. 

Trusts     .         .        .         .         .         .         .         .         .214 

Causes  of  trusts — Definition  and  explanation  of  the  various 
kinds  of  trusts — The  legality  of  trusts — The  tendency  of 
business  towards  large  concerns,  combinations,  and  con- 
solidation— Are  trusts  to  be  justified  as  a  legitimate  mode 
of  doing  business  on  a  large  scale  ? — The  monopoly  feat- 
ure of  trusts — The  dangers  which  are  besetting  the  trusts 
— Transformation,  reorganization,  and  disappearance  of 
trusts  into  large  corporations. 

CHAPTER   VI. 
Corporations  and  the  Republic         .         .         .  246 

Index       .         .         .  .        .         .      •  .  255 


THE   CORPORATION    PROBLEM 


CHAPTER    I. 

INTRODUCTORY. 

Corporations,  arc  a  creation  of  modern  times 
and  their  rise  has  been  as  rapid  as  it  has  been 
remarkable.  In  the  colonial  days  of  America  no 
instance  of  a  corporation  for  business  purposes  can 
be  found.  The  Bank  of  North  America  was  organ- 
ized in  1 78 1,  while  the  Massachusetts  Bank  and  the 
Bank  of  New  York  were  not  incorporated  until  the 
year  1784.  In  those  days  there  were  no  railroads, 
no  telegraphs,  no  manufacturing,  mining,  or  business 
corporations,  and  merely  the  germ  of  the  idea  of  a 
corporation  was  in  existence.  In  Great  Britain  there 
were  the  Bank  of  England,  the  Bank  of  Ireland,  and 
three  banks  in  Scotland.  Business  was  done  on  a 
small  scale  and  large  enterprises  were  not  under- 
taken. The  century  of  industrial  development,  of 
great  affairs,  and  of  colossal  projects  had  not  yet 
been  entered  upon. 

Since  that  time  such  projects  have  demanded  new 
and  improved  business  methods.     Corporations  have 


2  THE  CORPORATION   PROBLEM. 

arisen  from  the  necessities  of  business.  Partnerships 
and  individuals  have  been  unable  to  furnish  the 
aggregation  of  capital  required  for  modern  under- 
takings. 

Moreover  the  partnership  has  been  found  to  be 
clumsy,  dangerous,  and  insufficient.  If  unsuccess- 
ful it  brings  ruin  upon  all  of  its  members,  because 
each  partner  is  liable  absolutely  for  all  debts.  Any 
member  may  bind  the  firm  by  his  contract  and  each 
one  has  an  equal  voice  in  deciding  its  policy.  Its 
capital  and  credit,  and  consequently  its  amount  of 
business,  are  limited  necessarily  by  the  capital  and 
credit  of  a  very  few  men — the  members  themselves. 
The  death  of  a  member  or  the  transfer  of  his  inter- 
est dissolves  the  firm.  Any  member  may  arbitrarily 
cause  a  dissolution  at  any  time,  and  the  insolvency  of 
a  member  renders  the  partnership  property  subject 
to  levy  of  execution  for  his  debt.  Upon  the  death 
of  a  partner  the  surviving  partners  have  the  sole 
charge  of  winding  up  the  business  and  the  executor 
of  the  deceased  partner  is  not  allowed  to  come  in. 
A  partner  may  withdraw  his  money  only  at  a  sacri- 
fice, or  by  long  and  expensive  proceedings.  He  can- 
not conveniently  sell  his  interest  or  borrow  money 
upon  it.  New  partners  cannot  readily  or  safely  be 
admitted. 

The  partnership  is  restricted  in  its  capital,  danger- 
ous in  its  liabilities,  narrow  in  its  exclusion  of  new 
members,  too  free  in  its  mode  of  making  contracts, 
and  too  contracted  in  its  opportunities  for  withdrawal. 
It  is  becoming  obsolete  as  a  mode  of  doing  business 
on  a  large  scale. 


INTRODUCTORY.  3 

In  a  corporation  all  this  is  changed.  The  mem- 
bers are  not  liable  for  the  debts.  The  amount 
already  invested  may  be  lost,  but  the  private  for- 
tunes of  the  stockholders  are  not  involved.  The 
business  is  done  and  contracts  made,  not  by  all,  but 
by  a  select  few,  called  directors.  A  large  capital  is 
created  by  the  union  of  funds  from  many  sources. 
A  person  may  safely  invest  in  many  enterprises  and 
yet  not  take  part  in  the  management  nor  watch  the 
business  of  any  one  of  them.  The  leading  spirit  in 
an  enterprise  may  hold  a  majority  of  the  stock  and 
may  admit  associates,  employees  or  strangers,  as 
holders  of  a  minority  of  the  stock,  and  yet  he  will 
retain  the  management  as  though  he  were  the  single 
owner  of  the  concern.  Persons  may  easily  buy  into 
or  retire  from  the  enterprise.  Dissolution  is  not 
brought  about  by  the  death  or  withdrawal  or  dis- 
satisfaction of  a  stockholder.  The  insolvency  of  a 
stockholder  does  not  affect  the  business  of  the  cor- 
poration. Upon  the  death  of  a  stockholder  his  ex- 
ecutor votes  his  stock  and  has  a  voice  in  the  continu- 
ation of  the  business.  A  stockholder  may  sell  or 
pledge  his  interest  readily  and  intelligibly  by  reason 
of  the  reports,  dividends,  and  market  quotations  of 
his  stock.  The  corporation  is  a  protection  in  that 
the  liability  is  limited  ;  it  is  capable  in  that  it  ren- 
ders possible  the  collection  of  a  great  capital ;  it  is 
efficient  because  the  directors  and  they  alone  govern 
its  policy  and  its  contracts;  and  it  is  convenient 
because  it  is  easy  to  sell  or  buy  or  pledge  or  bequeath 
one's  interest  in  the  concern.  Under  its  protection 
and  concentrated  power  men  will  undertake  great 


4  THE   CORPORATION   PROBLEM. 

enterprises  involving  great  risks  or  losses  or  gains. 
The  corporation  has  rendered  possible  the  modern 
era  of  industrial  development. 

It  is  by  reason  of  all  these  facts  that  corporations 
have  come  into  universal  use.     They  have  absorbed 
the    railroad,    banking,     insurance,     manufacturing, 
mining,    telegraph,    telephone,    gas,   express,  water- 
works, commercial,  turnpike,  bridge,  canal,  steamship, 
financial,  and  other  industrial  business  of  the  coun- 
try.    They  have  built  the  railroads,  dug  the  canals, 
established    the    factories,    carried    the    ocean    com- 
merce, taken  charge  of  the  banks,  assumed  the  risks 
of    insurance,  constructed    the  telegraph,  the   tele- 
phone, the  water-works,  the  gas  plant,  the  electric 
lights,  and  the  street  railroads,  and  are  conducting 
some  of  the  largest  of  our  mercantile  interests.  They 
are  acquiring  the  wealth  of  the  country  and  are  the 
means  of  investment  for  the  savings  of  the  poor  as 
Avell  as  the  capital  of  the  rich.     The  railroads  alone 
of    the    United    States    are    over    167,000   miles    in 
length  ;  cost  over  $9,000,000,000 ;    employ  over  700- 
000  men  directly,  and  indirectly  over  1,000,000  men, 
being  one  twelfth  of  the  adult  male  population  of 
the  country  ;   receive  annually  about  $1,000,000,000 ; 
and  distribute  this  vast  sum  in  wages,  improvements, 
interest,   and   dividends.     And,  in   addition  to  this, 
the  banks,  insurance  companies,  manufacturing  com- 
panies,' and  the  multitudinous  corporations  of  the 
land  all  have  their  capital,  employees,  and  earnings. 
The   benefits   derived   from   corporations   are   un- 
doubted.    They  have  cheapened  the  necessaries  of 
life,  given  quick  and  easy  connection  between  dis- 


INTRODUCTORY.  5 

tant  points,  developed  agriculture,  mining,  manufac- 
turing, and  commerce;  created  employment  for 
labor,  marketed  the  products  which  before  were  not 
worth  the  cost  of  transportation,  lowered  the  cost  of 
living  in  Europe  and  America,  transformed  the 
uninhabited  wildernesses  into  rich  farms,  towns, 
cities,  and  States;  found  land  worth  nothing  and 
made  it  worth  millions,  and  caused  an  interchange 
of  the  manufactures,  luxuries,  literature,  arts,  sci- 
ences, and  ideas  of  the  world. 

As  an  intellectual  spur  and  stimulus,  the  railroads 
have  done  for  this  century  that  which  the  discovery 
of  America  did    for   the  sixteenth  century.     They 
have    brought    the    ends  of   the   country   together, 
excited    ambition,    opened    avenues    for   enterprise, 
developed    community    of    interest,    and.  made    a 
nation    diversified    in    its   pursuits    and    ideas,   yet 
homogeneous  in  its  government  and  progress.  They 
have  quickened  the  intelligence  and  broadened  the 
minds  of  men.     Not  only  have  they  created  energy 
and  intellectual  activity  among  the  people,  but  they 
have  peopled  the  country  itself,  and  in  some  instances 
have  caused  rude  and  ungovernable  communities  to 
put  aside  their  violence,   provincialism,   feuds,  and 
uncouth  manners  for  the  life  of  the  civilized  world. 
Corporations  have  given  wealth  to  man,  and  thereby 
given  to  him  the  opportunity  for  intellectual  growth. 
And  even  from  a  moral  point  of  view  the  corpora- 
tions are   not   utterly  and    irretrievably  bad.     The 
redeeming  act  in  the  life  of  Faust  was  the  building 
of   a   dyke  and    the    draining   of   a   swamp.      The 
builder  of  a  railroad  which  opens  new  lands  for  set- 


6  THE   CORPORATION   PROBLEM. 

tlement  is  a  philanthropist,  in  the  broadest  sense. 
The  great  capitaHsts  of  modern  times,  who  have 
built  thousands  of  miles  of  railroad,  peopled  whole 
territories,  cheapened  the  price  of  food,  enabled 
millions  of  men  from  the  overcrowded  parts  of  the 
world  to  find  homes  and  a  livelihood,  increased  the 
wealth  and  well-being  of  a  great  and  growing  popu- 
lation, and  made  possible  the  occupation  and  civil- 
ization of  the  American  continent,  are  the  greatest 
benefactors  of  the  age.  It  is  true  that  they  and 
their  corporations  are  not  philanthropic  institutions. 
They  do  not  cultivate  the  benevolent  side  of  life. 
They  are  not  moral  instructors  either  in  precept  or 
example,  nor  are  they  to  be  recommended  as  a 
school  of  ethics.  But  they  have  enabled  whole 
States  and  communities  to  reach  higher  and  better 
ideas  of  life.  They  have  bettered  the  condition  of 
men  and  thereby  have  enabled  individuals  to  be- 
come better  men. 

Without  corporations  America  would  be  a  different 
nation  and  have  had  a  different  history.  The  Civil 
War  would  have  been  more  dangerous  to  the  Re- 
public. The  present  railroad  system  could  not  have 
been  built,  and  the  Pacific  Coast  and  the  Eastern 
States  would  not  have  been  bound  by  ligaments  of 
steel  to  a  common  interest. 

Who  can  wonder  then  that  the  many  corporations 
of  America,  with  almost  unlimited  wealth  at  their 
command,  and  directed  by  the  highest  talent,  should 
have  a  firm  grasp  upon  the  industries  of  the  country ; 
that  they  should  mould  its  political,  social,  and  indus- 
trial features ;  that  they  are  deeply  affecting  its  intel- 


INTRODUCTORY.  f 

lectual  life,  and  even  to  a  large  extent  are  dominating 
the  government  itself  ? 

And  even  in  an  international  way  the  corporations 
have  had  a  wide  influence.  They  have  aided  in  the 
abolition  of  war,  and  have  rendered  a  prolonged  fam- 
ine impossible.  A  "  Thirty  Years*  War  "  in  these 
times  would  bankrupt  the  richest  of  nations.  Rail- 
roads have  made  war  swift,  expensive,  and  deadly. 
In  addition  to  this  the  corporations,  as  methods 
of  international  investments  by  way  of  stocks  and 
bonds,  have  brought  nations  into  more  friendly 
communication  with  each  other,  and  have  knit  more 
closely  the  financial,  social,  and  family  ties  that 
exist  between  Europe  and  America. 

And  yet  notwithstanding  all  the  advantages,  ma- 
terial, intellectual,  and  moral,  which  have  been  de- 
rived from  corporations,  there  is  much  to  be  said 
against  them.  And  they  have  two  peculiarities 
which  have  led  to  these  abuses.  These  are,  first, 
the  ease  with  which  all  responsibility  for  bad  acts 
is  placed  upon  the  corporation  itself,  while  the  real 
perpetrators  are  concealed  ;  second,  the  separation 
of  the  stockholders  from  the  corporate  agents,  of  the 
investor  from  the  investment,  of  the  principal  from 
the  agent,  with  the  expectation  on  the  part  of  the 
investor,  the  principal,  the  stockholder,  that  profits 
will  be  made,  honestly  if  possible,  but  that  profits 
will  be  made. 

The  particular  evils  to  which  they  have  given  rise 
will  be  referred  to  hereafter.  Some  of  the  corpora- 
tions have  been  guilty  of  bribing  judges,  buying 
legislatures,  corrupting  public  officers,  and  sapping 


8  THE   CORPORATION   PROBLEM. 

the  integrity  of  public  life  generally.  Some  of  them 
have  taught  men  that  dishonesty  is  respectable  and 
even  honorable,  provided  it  is  successful.  Some  of 
them  conduct  business,  not  on  a  basis  of  honor,  but 
on  that  of  knavery.  Some  of  them  perform  con- 
tracts only  when  it  is  more  profitable  to  perform 
than  to  violate.  The  sense  of  honor  of  some  of 
them  does  not  inspire  that  easy  confidence  and 
mutual  good  faith  which  lie  at  the  basis  of  most 
business  transactions.  Written  contracts  are  not  al- 
ways strong  enough  to  hold  them,  and  the  fear  of 
the  penitentiary  not  always  able  to  deter  them. 
The  pole-star  of  the  existence  of  many  of  them  is, 
not  what  is  honest,  but  what  is  profitable,  and  the 
result  is  that  not  only  are  corporations  a  source  of 
alarm  to  the  conservative,  and  a  subject  of  doubt  to 
the  thoughtful,  but  there  is  a  deep-seated  hostility 
against  them  on  the  part  of  the  plain  people  of 
the  land. 

The  railroad  corporation  has  been  the  chief  male- 
factor. It  has  given  secret  discriminations  in  rates ; 
bribed  legislatures  and  public  officers  by  free  passes 
and  money ;  charged  more  for  a  short  haul  of 
freight  than  for  a  long  haul ;  demanded  extortionate 
rates  ;  issued  "  watered  "  stocks  and  bonds  ;  favored 
one  city  and  ruined  another ;  entered  into  "  pools,'* 
and  usurped  valuable  franchises  by  fraud,  bribery,  and 
unscrupulous  practices.  Not  only  is  it  audacious  and 
skilful,  but  it  employs  the  highest  order  of  adminis- 
trative ability.  Indeed,  it  is  one  of  the  curious  facts 
of  American  history  that  the  American  talent  for  or- 
ganization, executive  management,  and  the  invention 


INTRODUCTORY.  9 

and  adoption  of  means  to  ends,  a  characteristic  talent 
that  formerly  was  engrossed  in  the  political  affairs 
of  the  nation,  is  now  very  largely  engaged  in  the 
development  and  management  of  the  American  rail- 
roads. With  energ}%  enterprise,  daring,  and  sagacity, 
the  American  railway  has  been  built,  improved,  con- 
solidated, and  perfected.  This  has  been  done  fre- 
quently far  in  advance  of  even  the  remarkable 
growth  of  the  country  itself.  And  to  a  large  extent 
the  practices  of  railroad  men  have  been  honest  and 
creditable.  But  not  always  has  this  been  the  case, 
and  often  they  have  resorted  to  fruitful  cunning  and 
bad  practices  in  accomplishing  their  ends.  To  such 
an  extent  have  these  practices  been  carried  that  even 
the  railroad  men  themselves  have  come  to  denounce 
the  prevalent  methods  of  managing  railroads. 

Public  opinion,  however,  is  beginning  to  decrease 
the  present  abuses  of  corporations.  And  the  power 
of  public  opinion  over  corporations  and  railroads  is 
much  greater  than  is  generally  supposed.  The  most 
powerful  corporations  of  the  country  seek  its  com- 
mendation and  fear  the  effects  of  its  disapproval. 
The  Granger  legislation,  the  withdrawal  of  the  Cen- 
tral Pacific  Railroad  Company  from  California  poli- 
tics, the  attempt  of  the  Standard  Oil  magnates  to 
change  public  sentiment,  the  wild  haste  of  the  vari- 
ous ''  Trusts  "  to  change  their  mode  of  organization, 
on  the  one  hand,  and  the  results  of  the  honest  and 
conservative  management  of  the  Vanderbilt  and 
other  great  systems  of  railroads  on  the  other,  are 
examples  of  the  power  and  effect  of  public  opinion. 

And  there  is  another  tendency  which  augurs  well 


lO  THE    CORPORATION   PROBLEM. 

for  the  future.  The  days  of  irresponsible,  reckless, 
and  dishonest  management  of  corporations  are  pas- 
sing away.  These  practices  have  been  found  to  be 
dangerous,  unprofitable,  and  ruinous.  Honesty  tow- 
ards the  government,  the  people,  and  the  investor 
is  becoming  the  settled  policy  of  the  great  corpora- 
tions. The  integrity  as  well  as  talent  of  America  is 
beginning  to  assume  the  control  and  management  of 
these  colossal  aggregations  of  capital.  Corporations 
and  railroads  are  being  placed  in  the  hands  of  con- 
servative men,  and  the  great  questions  of  the  "  Cor- 
poration Problem  "  are  not  only  decreasing  in  number 
and  intensity,  but  are  being  settled  largely  by  the 
character,  honesty,  and  honor  of  the  men  themselves 
who  manage  the  corporations. 


CHAPTER  II. 

VARIOUS  CONTROVERSIES  TO  WHICH  CORPORATIONS 
HAVE   GIVEN   RISE. 

Reduction  of  railroad  charges — "  Watered'"  stock  and  bonds 
— Discrimination  betiveen  individuals  —  Rebates  and 
secret  rates — Discrimination  betiueen  toicns — Charging 
more  for  a  short  than  for^  a  long  haul — Discrimination 
betiveen  articles — Charging  7vhat  the  traffic  will  bear 
— Free  passes — "  Pools  "  —  Railroad  wars  —  Useless 
paralleling  of  railroads — Foreclosures  and  reorganiza- 
tions— Stock  gambling — *'  Strikes  " — Frauds  on  stock- 
holders and  creditors  —  Mu7iicipal  aid  to  railroads — 
Limited  liability  of  stockholders  and  directors —  Taxa- 
tion and  exemptions  from  taxation — Incorporating  in 
one  State  and  doing  all  business  in  another  State — 
Special  charters — Exclusive  privileges  and  monopolies 
— Political  corruption — The  remedy. 

REDUCTION    OF    RAILROAD    CHARGES. 

Probably  of  all  the  differences  that  have  existed 
between  the  railroads  and  the  public,  the  first,  the 
greatest,  and  the  most  prominent  has  been  that  of 
reducing  railroad  charges.  Upon  this  question 
there  has  been  for  twenty  years  a  course  of  uninter- 
rupted legislation,  litigation,  and  pressure  of  public 
opinion.     From    State   legislatures  and    courts   the 

II 


12  THE   CORPORATION   PROBLEM. 

contest  has  been  carried  to  Congress  and  the 
Supreme  Court  of  the  United  States.  Reductions 
in  rates  have  been  brought  about  partly  by  means 
of  this  agitation  and  legislation  and  partly  by  reason 
of  competition  between  the  railroads  themselves. 
But  the  question  is  as  vital  a  question  to-day  in  the 
Western  States  as  it  was  twenty  years  ago,  and  the 
legislatures  are  again  making  radical  reductions  in 
railroad  rates.  It  is  interesting  to  inquire  how  this 
contest  arose,  and  why  the  reduction  is  demanded. 

Fifty  years  ago  the  Western  States  and  the 
Upper  Mississippi  valley  were  practically  unsettled. 
The  rich  lands  of  the  West  were  capable  of  becom- 
ing the  granary  of  Europe  and  America,  but  without 
cheap  transportation  they  were  valueless.  In  those 
early  days  the  farmer  could  not  sell  and  could  not 
afford  to  haul  his  crop  to  market,  and  corn  was 
burned  for  fuel.  The  farmer  had  no  money,  and 
he  could  make  no  improvements.  The  Western 
pioneer  was  cut  off  from  civilization,  from  comforts, 
and  even  from  the  necessaries  of  life. 

The  railroad  was  necessary — necessary  to  furnish 
a  market  and  to  populate  the  plains. 

The  railroads  were  built  and  the  great  territory 
was  traversed  and  covered.  Tens  of  thousands  of 
miles  of  road  were  required  and  were  built  in  an 
incredibly  short  space  of  time.  They  were  built  by 
Eastern  and  European  capital,  and  this  capital  knew 
that  it  was  embarking  in  a  dangerous  speculation. 
It  therefore  very  naturally  insisted  upon  great  re- 
turns, and  these  returns  consisted :  first,  of  gifts  of 
municipal  bonds  from  the  cities,  counties,  and  towns 


CONTROVERSIES.  1 3 

along  its  route ;  and  second,  of  vast  quantities  of 
"  watered  **  stock  and  bonds. 

The  gift  of  municipal  bonds  to  railroads  has  been 
denounced  by  the  greatest  American  jurists  of  the 
age  as  unjust,  improvident,  unnecessary',  and  illegal. 
Such  is  their  opinion,  although  the  Supreme  Court 
of  the  United  States,  in  its  efforts  to  protect  inno- 
cent investors,  and  to  preserve  the  honor  of  Ameri- 
can credit,  has  sustained  the  legality  of  such  bonds. 
But  the  hardship  of  their  issue  did  not  at  first 
appear.  It  was  not  at  first  realized  that  the  rail- 
roads were  built  largely  from  the  sale  of  these 
municipal  bonds.  The  bonds  were  given  because  if 
not  given  the  road  would  not  be  built  at  all,  or 
would  be  built  through  a  rival  town.  No  bonds 
— no  railroad.  After  the  bonds  were  issued  they 
were  sold  by  the  railroad  builders  to  Eastern  or 
European  capitalists.  They  were  sold  for  what 
they  would  bring,  and  always  below  par.  In  addi- 
tion to  the  location  of  the  railroad,  the  town  or 
county  usually  received  some  of  the  stock  of  the 
railroad  itself.  But  this  stock  was  soon  made  worth- 
less by  the  foreclosure  of  the  mortgage  on  the  rail- 
road. As  a  net  result  the  town  had  a  railroad,  to 
be  sure,  but  it  had  a  large  bonded  debt,  and  its  stock 
in  the  railroad  was  without  value.  The  railroad 
had  been  built  partially  by  municipal  bonds,  but  the 
railroad  itself  was  owned  by  capitalists  in  Eastern 
States  or  abroad.  It  was  true  that  land  had  risen  in 
value  and  crops  could  be  sold.  But  these  municipal 
bonds  had  to  be  paid,  principal  and  interest  at  par. 
They  were  a  mortgage  on  the  present  and  future  gen- 


14  THE   CORPORATION   PROBLEM. 

erations.  Taxes  began  to  be  high.  And  then  the 
question  arose — were  the  railroads  acting  fairly  ;  were 
they  contenting  themselves  with  a  reasonable  profit; 
were  they  charging  proper  rates,  or  were  they  charg- 
ing more  than  their  cost  would  justify? 

Here  it  was  that  the  watered  stock  and  bonds  of 
the  railroad  came  into  notice.  And  they  made  the 
problem  one  that  has  caused  endless  discussion,  legis- 
lation and  litigation  during  the  past  twenty  years. 
The  peculiarities  of  watered  stock  and  bonds 
will  be  considered  hereafter.  The  early  railroad 
builder,  promoter,  and  manipulator  was  as  crafty 
and  many-sided  in  his  methods  as  Ulysses  him- 
self. He  was  skilled  in  the  art  of  issuing  watered 
stock  and  bonds.  By  devices,  well  known  to  the 
corporation  lawyer,  he  generally  managed,  if  his  road 
actually  cost  $1,000,000,  to  issue  $2,000,000  of  stock 
and  $2,000,000  of  railroad  bonds  secured  by  a  mort- 
gage on  the  road  itself.  He  accordingly  had  $4,000,- 
000  of  stock  and  bonds,  and  of  this,  $3,000,000  was 
pure  "water."  In  the  course  of  time  these  bonds 
and  stock  were  sold.  They  passed  into  bona-fide 
hands.  The  result  was  that  a  railroad  costing  $1,- 
000,000,  part  of  which  was  raised  by  municipal  bonds 
given  to  the  railroad  itself,  had  obligations  outstand- 
ing for  $4,000,000  upon  which  it  endeavored  to  pay 
interest  and  dividends.  Even  though  a  foreclosure 
took  place,  the  new  issue  of  stock  and  bonds  was 
equal  to  or  greater  than  that  existing  before.  Exor- 
bitant rates  for  transportation  were  necessary  in  order 
to  pay  the  interest  alone,  and,  generally,  for  many 
years  there  was  nothing  for  dividends  on  the 
watered  stock. 


CONTROVERSIES.  1 5 

But  population  grew  and  business  increased.  The 
income  became  greater  and  greater.  Nevertheless 
the  rates  were  not  reduced.  They  were  used  to  pay 
dividends  on  the  watered  stock,  and,  if  the  income 
became  too  large  even  for  this,  then  by  certain 
other  devices,  well  known  to  the  astute  corporation 
lawyer,  further  issues  of  watered  stock  and  bonds 
were  made.* 

Then  came  another  factor  in  the  problem.  The 
American  farmer  no  longer  obtained  high  prices  for 
his  grain.'  The  wheat  of  Egypt,  India,  and  the  Black 
Sea  reduced  the  price  in  Liverpool,  and  the  price  in 

*  The  argument  is  sometimes  made  that  the  amount  of  railway 
capitalization  has  but  little  influence  upon  passenger  and  freight 
charges,  and  that  those  charges  are  determined  by  the  competition  of 
waterways  and  other  railways,  and  by  the  rates  of  connecting  rail- 
roads into  other  States  and  foreign  countries. 

This  may  be  true,  but,  as  will  be  shown  hereafter,  when  with  the 
growth  of  population  the  business  of  a  railroad  increases  to  such  an 
extent  that  its  charges,  governed  though  they  may  be  by  the  above 
causes,  pay  an  extravagant  rate  of  profit  on  its  cost,  then  the 
watered  stock  and  bonds  conceal  the  real  rate  of  profit  that 
the  railroad  is  paying,  and  consequently  a  reduction  of  rates 
becomes  almost  impossible.  The  railroad  contests  the  reduction, 
first  in  the  legislature  and  then  in  the  courts,  and  its  plea  always  is 
that  its  existing  rates  pay  no  more  than  interest  on  the  bonds  and  fair 
dividends  on  the  stock,  when  the  fact  is  that  part  of  the  bonds,  and 
generally  all  of  the  stock  are  "  water." 

'  For  instance,  in  January,  1890,  shelled  com  was  selling  in  Kansas 
at  sixteen  cents  a  bushel,  while  at  the  same  time  it  was  selling  in 
Chicago  for  twenty-eight  and  one  half  cents  a  bushel.  Twelve  and 
one  half  cents  went  to  the  railroads.  At  sixteen  cents  a  bushel  the 
farmer  made  little  or  no  profit. 

The  Interstate  Commerce  Commission  says  in  its  reports  (vol.  iv. 
p.  76)  that  "  the  price  paid  for  Nebraska  corn  by  the  buyer  in  £ast< 
em  markets  is  in  the  larger  part  paid  for  transportation  charges." 


l6  THE   CORPORATION   PROBLEM. 

Liverpool  fixes  and  will  fix  the  price  in  America  so 
long  as  America  exports  wheat.  The  farmer  found 
that  the  halcyon  prices  of  old  were  gone  and  were 
not  to  return.  He  found  that  the  railroad  charges 
were  consuming  a  very  large  share  of  his  crops. 
He  was  working  for  the  railroads,  and  corn  was 
being  burned  for  fuel  on  the  Western  prairies.  Hard 
times  prevailed. 

This  was  the  situation  :  land  had  risen  in  value, 
crops  could  be  sold,  communication  with  the  outer 
world  had  been  established,  and  a  flood  of  immigra- 
tion had  populated  the  country.  But  the  crops 
could  not  be  sold  at  a  profit ;  the  railroads,  which 
had  been  built  largely  by  municipal  bonds,  had 
issued  large  quantities  of  watered  bonds  and  stock; 
heavy  rates  for  transportation  were  charged  in  order 
to  pay  interest  and  dividends  on  all  these :  and  the 
railroads  were  receiving  a  great  income  on  their  first 
cost,  while  the  people  at  large  were  poor. 

Why  did  not  the  railroads  reduce  their  charges  ? 
Because  the  owners  of  the  railroads  were  non-resi- 
dents, and  insisted  upon  every  dollar  that  could  be 
wrung  from  their  investment. 

"  Practically  none  of  the  stocks  and  bonds  of  the  railroads  in  Nebras- 
ka are  owned  by  Nebraskans.  The  owners  and  controlling  officers 
of  the  road  are  non-residents.  This  absenteeism  increases  the  popu- 
lar dislike  of  the  roads.  It  is  felt  that  any  unearned  profits  not  only 
injure  individuals  but  impoverish  the  community  as  a  whole,  while 
the  representatives  of  the  roads  within  the  State  are  looked  upon  as 
mere  hirelings,  owing  to  the  companies  duties  which  are  inconsistent 
with  good  citizenship."  ^ 

'  Prof.  Amos  G.  Warner  in  the  Political  Science  Quarterly^  vol.  vi., 
No.  I.   In  the  report  of  the  Union  Pacific  Railroad  Company  for  1888  is 


CONTROVERSIES.  1 7 

The  stockholders  and  bondholders  wanted  their 
income,  and  were  too  far  distant  from  the  inv^estment 
itself  to  understand  or  have  any  sympathy  with  the 
situation.  The  corporation  officers  were  their  agents, 
and  the  tenure  of  office  of  those  agents  depended 
upon  the  profits  that  were  forthcoming.  Neither 
the  owners  nor  their  agents  saw  any  occasion  for  a 
reduction  of  rates.  Nor  was  the  natural  competi- 
tion among  the  railroads  themselves  sufficient  to 
reduce  rates.  Some  reductions  were  made  from  this 
source,  but  not  many.  It  was  to  the  interest  of  the 
railroads  not  to  compete.  They  were  all  prospering, 
and  there  was  nothing  to  be  gained  by  great  reduc- 
tions. In  the  cities,  where  there  should  have  been 
competition,  the  railroads  formed  combinations, 
called  *'  pools,"  and  by  these  they  divided  the  busi- 
ness and  maintained  high  rates.  In  the  smaller 
towns  and  the  country  districts  there  was  no  com- 
petition at  all. 

Moreover,  the  old  theory  that  the  laws  of  compe- 
tition will  induce  railroads  to  reduce  their  rates  has 
been  exploded.  A  railroad  becomes  a  monopoly  in 
spite  of  competition.  Few  care  to  risk  their  money 
in  paralleling  it.  If  a  parallel  line  is  built,  even  in 
the  old  and  rich  communities,  a  railroad  ''  war  "  of 
rates  takes  place,  part  of  the  capital  is  irretrievably 

given  the  distribution  of  that  company's  stock.  Out  of  a  total  in 
round  numbers  of  600,000  shares,  one  third  is  held  in  New  England 
and  one  third  in  New  York.  Of  the  States  through  which  the  road 
runs,  500  shares  are  owned  in  Nebraska,  100  in  Utah,  27  in  'Wyo- 
ming, and  5  in  Colorado.  Thus  all  the  States  last-named  own  but 
one  tenth  of  one  per  cent,  of  the  stock  of  this  company. 


l8        THE  CORPORATION  PROBLEM. 

lost,  foreclosure  of  the  new  line  follows  swiftly  after, 
and  a  consolidation  takes  place,  always  with  a  loss. 
The  Nickel  Plate  road  from  Buffalo  to  Cleveland 
brought  loss  to  Vanderbilt,  its  purchaser.  The  West 
Shore  road  from  Buffalo  to  New  York  brought  ruin 
to  its  builders.  In  both  cases  the  old  monopoly  has 
become  a  greater  monopoly  than  ever.  The  truth 
is  that  a  railroad  is  a  natural  monopoly.  The  laws 
of  competition  do  not  regulate  it,  and  so  far  as  the 
farmer  is  concerned,  railroad  competition  leaves  him 
worse  off  than  before.  After  consolidation  or  "  pool- 
ing "  there  are  two  roads  where  only  one  is  needed, 
and  the  stock  and  bonds  of  the  two  are  double  the 
burden  that  existed  before. 

There  was  another  plan  for  effecting  a  reduction 
of  rates.  This  also  has  been  exploded.  It  was  the 
old  and  futile  device  of  having  the  charter  or  statutes 
limit  the  dividends  on  the  stock  to  a  fixed  percent- 
age. Such  a  restriction  has  proved  a  delusion  and 
a  snare.  If  the  dividends  reach  the  limited  point, 
watered  stock  or  bonds  are  issued,  and  always 
sufficient  in  quantity  to  absorb  the  increased  profits 
without  exceeding  the  prescribed  rate  of  dividends. 
Both  in  England  and  America  this  device  has  failed. 
Worst  of  all,  it  promised  well,  and  by  its  promises 
caused  the  public  to  waste  valuable  franchises  and  to 
desist  from  the  search  for  other  plans  of  relief,  and 
there  are  still  other  objections  to  such  a  statutory 
restriction. 

**  It  takes  away  all  motive  to  develop  new  business.  But  the  desire 
to  develop  such  business  has  been  the  most  potent  factor  in  reducing 
rates.     Take  it  away,  and  you  tend  to  keep  rates  up  rather  than  to 


CONTROVERSIES.  1 9 

lower  them.  By  trjing  to  prevent  a  railroad  from  dividing  all  it  can 
earn,  you  defeat  your  own  puqioses.  .  .  .  Limitation  of  divi- 
dend prevents  reduction  of  rates  instead  of  stimulating  it. 

"  This  is  no  theor)-.  It  rests  on  actual  experience.  The  plan  of 
limiting  dividends  has  been  more  widely  tried  in  England  than  in 
America.  Sir  Thomas  Farrar,  for  a  long  time  Secretar)-  of  the  Board 
of  Trade,  and  the  highest  authority  on  the  subject  in  CIreat  Britain, 
if  not  in  the  world,  does  not  hesitate  to  pronounce  the  attempt  a 
complete  failure.  He  says  that  *  in  Parliamentary  limitation  of  di\'i- 
dend  they  have  gone  on  a  wrong  tack  and  involved  themselves  in  a 
maze  of  absurdities,'  that  '  the  principle  is  in  itself  faulty,'  that  '  so 
long  as  the  charge  is  not  too  high  the  public  have  no  interest  in  the 
reduction  of  dividend  :  their  interest  is  in  the  reduction  of  price, 
which  is  a  ti>tally  different  thing.  The  fallacy  lies  in  supposing  that 
what  is  taken  from  the  shareholders  necessarily  goes  into  the  pocket 
of  the  consumer.  It  does  no  such  thing.'  This  is  the  result  of  thirty 
years*  practical  experience  in  the  effort  to  control  corporations  in 
Europe." ' 


'  Railroad  GazetU,  March  15,  1889. 

There  are  many  ways  of  distributing  profits  without  declaring  divi- 
dends. In  fact,  whenever  it  is  an  object  for  a  railroad  to  observe  a 
limit  on  its  dividends,  it  is  remarkably  successful  in  doing  so.  For 
instance,  ever  since  the  incorporation  of  the  Wilmington  and  Weldon, 
the  Raleigh  and  Gaston,  and  the  North  Carolina  Railroad  Companies 
in  North  Carolina  more  than  fifty  years  ago,  these  corporations  have 
been  exempt  from  State  and  county  taxation  until  their  dividends 
amount  to  eight  per  cent.  One  of  the  many  attempts  to  show  that 
more  than  eight  per  cent,  has  been  made  by  these  corporations  was  by 
a  legislative  committee  in  1890.  There  was  a  great  hue  and  cry  by 
the  Farmers'  Alliance  against  the  three  companies  mentioned,  and 
this  organization  insisted  that  this  exemption  should  not  exist  any 
longer.  Without  regard  to  future  tax,  the  Raleigh  and  Gaston  Com- 
pany paid  into  the  State  treasur)'  $17,000,  and  stopped  the  investiga- 
tion into  its  afTairs, 

A  still  more  decisive  proof  of  the  failure  to  accomplish  any  good 
by  limiting  dividends  is  that  of  the  New  York  Central  Railroad  Com- 
pany. Formerly  this  Company  was  practically  limited  to  ten  per 
cent,  dividends  on  its  stock,  and  was  prohibited  from  increasing  its 
capital  stock.     Nevertheless,  in  1868,  an  "interest  certificate"  divi- 


20  THE   CORPORATION   PROBLEM. 

Hence  it  was  that  to  the  western  farmer  there 
seemed  to  be  but  one  remedy — the  power  of  the  leg- 
islature. Consequently  statutes  were  passed  arbitra- 
rily reducing  railroad  rates.  Sometimes  the  statutes 
provided  for  the  appointment  of  State  Railroad 
Commissioners,  and  gave  power  to  these  commis- 
sioners to  reduce  rates.  In  Iowa,  Wisconsin,  Illinois, 
Ohio,  Missouri,  Minnesota,  and  Michigan  various 
statutes,  known  as  ''Granger  Laws,"  were  enacted. 
The  movement  was  bold,  radical,  and  sweeping. 
But  the  statutes  were  at  once  contested  in  the  courts 
by  the  railroads.  The  railroads  claimed  that  the 
statutes  were  unconstitutional.  The  old  Dartmouth 
College  decision  of  the  Supreme  Court  of  the  United 
States,  which  had  thrown  a  sort  of  halo  of  legal 
sanctity  about  a  corporation  charter  as  being  a  con- 
tract that  could  not  be  disturbed,  was  appealed  to. 
That  decision  had  proved  to  be  a  rock  upon  which 
many  a  State  statute  regulating  railroads  had  gone 
to  pieces.  The  Supreme  Court  of  the  United  States, 
however,  when  the  question  came  before  it,  de^ 
cided  that  the  '*  Granger  Laws  "  were  legal  and  con- 
stitutional.    The  farmers  had  won  their  fight. 

Charles  Francis  Adams  has  said,  in  regard  to  this 
subject : 

' '  Of  the  Granger  episode  little  now  needs  to  be  said.  That  it  did  not 
originate  without  cause  has  already  been  pointed  out.  It  is  quite  safe 
to  go  further  and  to  say  that  the  movement  was  a  necessar)'  one,  and 

dend,  being  the  same  thing  in  effect  as  a  stock  dividend,  was  declared. 
It  amounted  to  $23,036,000,  being  an  eighty  per  cent,  dividend.  At 
a  later  date  the  "  interest  certificates  "  were  called  in,  and  full  paid 
shares  of  stock  were  issued  in  exchange.  See  Bailey  vs.  R.  R.  Co., 
22  Wall,  604. 


CONTROVERSIES.  21 

through  its  results  has  made  a  solution  of  the  railroad  problem  possi- 
ble in  this  countr)'.  At  the  time  that  movement  took  shape  the  rail- 
road corporations  were,  in  fact,  rapidly  assuming  a  position  which 
could  not  be  tolerated.  Corporations,  owning  and  operating  the 
highways  of  commerce,  claimetl  for  themselves  a  species  of  immunity 
from  the  control  of  the  law-making  power.  .  .  .  They  had  thor- 
oughly got  it  into  their  heatls  that  they,  as  common  carriers,  were  in 
no  way  bound  to  afford  equal  facilities  to  all,  and,  inileed,  that  it  was 
in  the  last  degree  absurd  and  unreasonable  to  expect  them  to  do  so. 
The  Granger  method  was  probably  as  good  a  method  of  approaching 
men  in  this  frame  of  mind  as  could  have  been  devised."  ' 

Such,  in  brief,  has  been  the  history  of  this  phase  of 
"  The  Corporation  Problem."  And  even  yet  it  is 
not  ended.  The  Granger  episode  is  again  being 
repeated  in  the  Western  States.  Hard  times  prevail 
there  among  the  farmers  and  the  railroads  are  again 
being  assailed.  New  reductions  in  rates  have  been 
made.  The  Supreme  Court  of  the  United  States 
has  recently  decided  that  a  reduction  in  rates  must 
still  leave  to  the  railroads  a  living  profit,  but  the 
Interstate  Commerce  Commission  seems  to  repu- 
diate the  rule  that  railroad  charges  must  not  be 
reduced  so  low  ''  that  carriers  would  be  left  unable 
to  pay  interest  on  their  obligations  and  something 
by  way  of  dividend  to  stockholders,  after  maintaining 
the  road  in  proper  condition  and  paying  all  running 
expenses." 

'  Adams  on  "  Railroads,"  pp.  127,  128. 

*  Among  other  reasons,  showing  that  this  rule  is  impracticable,  the 
Commission  says  : 

"  But  over  and  beyond  all  this  the  attempt  to  apply  the  rule  sug- 
gested would  be  absolutely  futile  for  the  reason  that  the  rates  pre- 
scribed for  one  road  would  necessarily  affect  all  others  that  either 
directly  or  indirectly  came  in  competition  with  it.  If,  therefore,  of 
two  roads  competing  for  business  between  important  points,  one  were 


22         THE  CORPORATION  PROBLEM. 

The  latest  victory  of  the  western  farmer  has  been 
the  decision  of  the  Interstate  Commerce  Commission 

very  largely  indebted,  so  that  at  rates  fixed  by  the  official  board  it 
were  barely  able  to  pay  running  expenses  and  interest,  and  the  other 
were  free  from  indebtedness  and  able  to  pay  large  dividends,  any  ac- 
tion of  the  public  authorities  whereby  the  rates  of  the  last-named  road 
were  reduced,  and  at  the  same  time  the  rates  of  the  other  not  affected, 
would  be  plainly  and  obviously  impossible.  The  one  must  put  down 
its  charges  when  the  rates  of  the  other  are  forced  down." — "Fourth 
Annual  Report,"  p.  i8,  etc. 

The  Interstate  Commerce  Commission  in  its  decisions  (vol.  iv.,  pp. 
65,  73)  says  :  '*  The  Chicago,  Santa  Fe,  and  California  and  the  Chicago 
and  Alton  roads  run  side  by  side  between  Chicago  and  Kansas  City. 
The  Alton  is  capitalized  at  $46,000  per  mile,  the  Santa  Fe  at  $92,000. 
Their  rates  must  necessarily  be  the  same.  Must  they  be  such  as  to 
yield  income  on  the  basis  of  the  Alton's  capital  and  obligations,  or  on 
the  capital  and  obligations  of  the  Santa  Fe  which  are  double  as  much  ? 
The  bonded  debt  and  capital  of  the  Burlington  and  Missouri  River  in 
Nebraska  is  $37,000  per  mile,  and  of  the  Tremont,  Elkhorn,  and 
Missouri  Valley  $36,000.  They  parallel  on  either  side  of  the  Union 
Pacific,  capitalized  at  $105,000  per  mile.  The  bonded  debt  of  the 
Union  Pacific  per  mile  is  $71,840  and  is  nearly  double  both  bonded 
debt  and  capital  stock  of  either  of  the  other  two  roads.  The  three 
must  of  necessity  carry  on  the  same  terms.  The  bonded  debt,  saying 
nothing  of  the  capital  stock  of  the  Union  Pacific,  is  double  its  original 
cost,  or  the  cost  of  replacing  it  with  its  $17,000,000  terminals.  .  .  . 
The  New  York,  Lake  Erie  and  Western  with  a  bonded  debt  of  more 
than  $132,000  per  mile  could  make  rates  on  the  same  basis  with  the 
Chicago  &  Northwestern  or  the  Chicago,  Burlington,  &  Quincy  with 
funded  debts  but  slightly  exceeding  $20,000  per  mile  for  one  and 
$24,000  for  the  other.  The  funded  debt  of  the  Illinois  Central  but 
little  exceeds  $23,000  per  mile,  and  the  Chicago,  Rock  Island  & 
Pacific  less  than  $16,000.  That  of  the  New  York  Central  is $85,000. 
Their  reported  tonnage  cost  and  capitalization  are  nearly  in  like  pro- 
portion. The  reported  cost  of  service  is  less  on  the  Illinois  Central 
and  more  on  the  Rock  Island  than  on  the  New  York  Central." 

In  Michigan  the  highest  court  has  recently  decided  to  be  consti- 
tutional a  statute  by  which  all  Michigan  roads  whose  gross  passenger 
earnings  are  $3,000  per  mile  per  annum  shall  charge  passenger  fares 


CONTROVERSIES.  23 

reducing  the  railroad  rates  for  the  transportation 
of  grain.* 

This  much  seems  to  be  clear.  If  railroad  rates 
had  been  reduced  in  times  of  depression,  and  raised 
in  times  of  prosperity  ;  if  the  railroads  had  sought 
only  to  pay  a  fair  profit  on  their  actual  cost ;  if  there 
had  been  less  arrogance  and  lordliness  on  the  part  of 
railroad  officials  in  dealing  with  the  public  ;  if  there 
were  more  sympathy  between  the  real  interests,  pros- 
perity, dealings,  and  communications  of  the  railroad 
owners  and  officials  on  the  one  hand,  and  the  rail- 
road patrons  on  the  other  ;  if  there  were  more  honesty 
on  the  part  of  the  railroad  official,  and  less  corrup- 
tion of  legislatures,  less  granting  of  free  passes,  less 
discrimination,  and  a  less  lengthy  list  of  evils  which 
railroads  are  guilty  of;  then  the  question  of  ex- 
orbitant railroad  charges  and  reductions  thereof 
by  States  would  not  have  arisen.  The  American 
people  are  honest,  generous,  and  intelligent.     They 

of  not  over  2  cents  a  mile  ;  those  whose  earnings  are  between  $2,cxx) 
and  $3,000,  2|  cents,  and  all  others  3  cents,  special  exceptions  being 
made,  however,  for  upper  Peninsula  roads. 

'  The  Interstate  Commerce  Commission  goes  a  great  ways  when  it 
says  in  its  decision  In  the  Matter  of  Excessive  Freight  Rates  (4  Inter- 
state Com.  Rep.,  64)  :  "  Iowa  farmers  make  no  impertinent  inquiry 
when  they  ask  why  they  should  pay  7  cents  a  bushel  more  to  market 
their  corn  than  is  paid  by  their  Illinois  neighbors.  Seven  cents  to 
them  is  more  than  five  millions  of  dollars  on  the  year's  surplus.  Nor 
is  it  surprising  that  corn  growers  west  of  the  Missouri  should  be  urgent 
in  demanding  the  reasons  which  require  them  to  pay  double  as  much 
as  their  neighbors  in  the  corn  States  east  of  the  Mississippi  pay  to 
reach  a  common  market  in  which  all  must  sell  at  the  same  price. 
There  is  nothing  in  these  very  proper  inquiries  to  justify  any  imputa- 
tion that  they  imply  menace  to  the  property  rights  of  investors  in 
railroad  property." 


24  THE   CORPORATION   PROBLEM. 

would  appreciate  and  reward  railroad  honesty,  but 
the  abuses  and  usurpations,  of  which  corporations 
have  been  guilty,  have  rendered  wellnigh  impossible 
an  unprejudiced  and  impartial  attitude  on  the  part 
of  the  public. 

WATERED    STOCK    AND    BONDS — STOCK    DIVIDENDS. 

When  it  is  borne  in  mind  that  probably  every 
railroad  in  this  country  has  issued  watered  stock 
or  bonds;  that  it  is  the  universal  custom  for  gas 
companies,  water-works  companies,  telegraph,  tele- 
phone, electric-light,  and  all  other  quast-puhlic  cor- 
porations to  do  the  same  ;  and  that  the  object 
of  these  issues  is  to  cover  up  the  percentage  of 
profits  of  the  enterprise  in  order  to  prevent  any 
statutory  reduction  of  rates,  it  will  be  clear  why  it 
is  that  the  people  have  endeavored  to  prevent  the 
watering  of  stock    and  bonds. 

Watered  stock  is  stock  which  is  issued  as  fully 
paid  up  when  in  fact  its  full  par  value  has  not  been 
paid  into  the  corporation.  Hence  it  is  that  all  stock 
or  bonds,  whose  full  par  value  has  not  been  paid 
into  the  corporation,  in  money  or  money's  worth, 
are  watered  to  the  extent  that  the  par  value 
exceeds  the  amount  actually  paid  in.  An  issue  of 
such  stock  and  bonds  is  made  in  one  of  three  ways : 
for  cash  ;  for  property  ;  or  by  a  stock  dividend  ;  and 
the  liabilities  and  dangers  incurred  by  each  method 
vary  according  to  the  skill  with  which  the  legal  work 
is  done.  The  usual  method  is  by  an  issue  of  prop- 
erty, the  property  being  taken  by  the  corporation 
at  an   over-valuation.      Frequently   shares   of  stock 


CONTROVERSIES.  2$ 

whose  par  value  is  a  million  dollars  will  be  issued  as 
fully  paid  for  by  land,  factories,  plant,  patents,  or 
construction  work,  the  real  value  of  which  is  less 
than  one  hundred  thousand  dollars.  Indeed,  hun- 
dreds of  millions  of  dollars  par  value  of  railroad 
stock  and  bonds  have  been  issued  as  full  paid,  in 
exchan<;e  for  railroad  construction  work  that  was 
worth  not  over  one  third  of  that  par  value. 
The  Interstate  Commerce  Commission  says : 

"  It  is  believed  that  cases  are  now  comparatively  rare  in  which  the 
capital  stock  of  our  railroad  companies,  as  the  same  now  exists,  was 
actually  issued  for  cash  to  bona-fuie  investors  in  the  same.  In  many 
cases  roads  have  been  built  by  the  issuance  of  stock  to  the  contractors 
or  construction  companies  ;  frequently  by  the  creation  of  bonds  to  an 
amount  nearly  or  quite  sufficient  to  cover  the  actual  construction  cost, 
the  stock  being  in  the  nature  of  a  bonus  or  profit,  or  being  employed 
as  compensation  for  services  or  expenses  collaterally  attending  the 
construction  of  the  road."  • 

There  is  still  another  device  adopted  for  issu- 
ing watered  stock  and  bonds.  A  prosperous  and 
solvent  railroad  often  issues  a  vast  quantity  of 
watered  stock  and  bonds  in  payment  for  another 
road  which  is  purchased  or  leased.  Still  another 
plan  is  for  a  prosperous  railroad  to  water  its 
stock  by  a  stock  dividend.  Commodore  Vanderbilt 
adopted  this  latter  device  in  his  New  York  Central 
Railroad  Company.  Soon  after  he  had  consolidated 
the  eleven   lines  into  one  the  earnings  increased  to 

'  Second  annual   report,  p.    63.    Mr.  Poor  said  in    1885  that  the 

actual  cost  in  money  of  all  the  roads  in  the   United  States  did  not 

exceed   153,787,000,000,    and    that    the    fictitious   capitalization  was 
$3,708,000,000. 


26  THE   CORPORATION   PROBLEM. 

such  a  remarkable  extent  that  a  stock  dividend  was 
declared,  and  the  New  York  Central  Railroad  to-day- 
is  paying  dividends  on  nearly  double  its  original 
cost/ 

The  Western  Union  Telegraph  Company  also,  a 
few  years  ago,  declared  a  stock  dividend  of 
$15,000,000,  and  the  New  York  Court  of  Appeals 
declared  it  to  be  legal. 

The  abuses  of  watered  stock  and  bonds  are  not 
denied,  nor  defended.  First  of  all  the  investing 
public  are  injured.  A  bond  or  stock  that  is  sup- 
posed to  represent  value,  and  is  purchased  on  that 
supposition,  is  subsequently  found  to  represent 
nothing  of  the  kind.  It  is  found  that  although  the 
corporation  has  nominally  a  large  capital  stock,  yet 
that  its  capital  stock  is  mostly  water.  Then  follow 
insolvency,  foreclosure,  receivership,  reorganization, 
and  a  general  loss  or  reduction  of  the  old  stock  and 
bonds.  The  investor  is  a  victim  of  watered  stocks 
and  bonds. 

The  business  public  also  have  a  grievance  herein. 
A  newly  constructed  railroad,  built  upon  a  large 
issue  of  watered  stock  and  bonds,  is  almost  certain 
to  become  bankrupt.  Sooner  or  later  the  crash 
comes.  The  railroad  cannot  earn  enough  to  pay 
expenses  and  interest  on  its  watered  bonds.  Its 
projectors  and  builders  probably  never  expected  it 
would  pay,  but  they  built  it  to  sell  to  the  public  or 

*  As  already  stated  elsewhere,  the  New  York  Central  Railroad 
Company  in  1868  declared  a  stock  dividend,  but  called  it  an  "  inter- 
est-certificate "  dividend,  of  $23,036,000,  it  being  a  dividend  of 
eighty  per  cent,  on  the  capital  stock.  See  Bailey  vs.  R.  R.  Co.,  22 
Wall,  604. 


CONTROVERSIES.  2/ 

some  other  railroad.  When  the  road  fails  to  pay 
interest  the  inevitable  foreclosure  and  receiver  conie. 
If  the  railroad  is  a  large  one  a  shock  is  given  to  the 
business  world.  Nor  is  this  the  worst.  The  receiver 
enters  upon  the  operation  of  the  road.  It  matters 
not  to  him  whether  the  road  earns  anything  or  not. 
He  carries  traffic  at  reduced  figures.  Heavy  losses 
are  suffered  by  the  investors  and  real  owners  of  the 
road.  General  business  is  deranged  and  imperilled. 
Watered  bonds  have  done  the  evil. 

President  Roberts  of  the  Pennsylvania  Railroad 
is  reported  to  have  said  in  1886: 

"If  State  legislatures  and  Congress  would  pass  proper  laws  for  the 
protection  of  railroads,  no  pools  would  be  necessary.  We  are  com- 
mon carriers,  and  it  is  proper  enough  that  the  government  should 
exercise  supervision  over  us  :  but  it  should  at  the  same  time  protect 
us  by  proper  laws.  Under  the  general  railroad  law  of  Pennsylvania, 
and  its  recent  amendments,  the  railroads  of  the  State  are  at  the  mercy 
of  speculators.  Under  the  law  any  one  can  build  a  railroad  and  issue 
stocks  and  bonds  to  an  unlimited  extent  and  at  any  rate,  to  the  amount 
of  four  or  five  times  the  cost  of  the  road.  The  securities  are  sold. 
The  road  cannot  earn  the  interest  on  its  securities,  and  goes  into 
bankruptcy.  No  responsible  company  can  compete  with  an  irre- 
sponsible company.  No  company  managed  by  its  owners  can  com- 
pete with  one  managed  by  a  receiver.  It  makes  no  difference  to  the 
receivers  whether  the  road  he  manages  earns  5  cents  or  $5." 

Still  another  wrong  results  from  this  watering 
process.  When  the  foreclosure  of  a  railroad  takes 
place,  by  reason  of  the  large  issue  of  "  watered  " 
bonds,  then  the  stock  which  has  been  given  to  the 
cities,  counties,  and  towns,  for  their  gifts  of  municipal 
bonds  to  the  railroad,  is  entirely  wiped  out.  Often, 
indeed,  this  is  the  very  result  which  is  sought  for  by 


28  THE   CORPORATION   PROBLEM. 

the  manipulators  and  builders  of  the  road.  And  it 
it  is  a  method  which  is  swift,  certain,  and  profitable. 
It  is  the  natural  result  of  a  large  issue  of  "  watered  " 
bonds. 

At  a  notable  banquet  of  the  New  England  Society, 
held  in  New  York  in  December,  1890,  Congressman 
A.  B.  Cummings,  of  Iowa,  said,  in  regard  to  this 
subject : 

'•  The  people  of  Iowa,  not  inclusive  of  those  who  are  intimately  con- 
nected with  these  enterprises,  have  contributed  either  voluntarily  or 
involuntarily  more  than  $25,000,000  in  money  to  aid  in  the  construc- 
tion of  railways  within  the  borders  of  the  State.  This  was  not  designed 
as  a  donation.  It  was  the  intent  of  the  law  under  which  these  aids 
were  authorized — I  had  almost  said  extorted — from  a  community  illy 
able  to  make  the  investment,  that  those  whose  money  helped  to  create 
should  share  in  ownership,  and  to  that  extent  at  least  the  property 
should  not  be  alien.  It  was  intended  that  the  people  should  always  feel 
the  pressure  of  their  legislation  and  observe  in  their  own  persons  the 
prosperity  or  adversity  of  the  interests  they  help  to  build  up.  But 
the  beneficent  plan  has  woefully  miscarried  ;  for  under  the  rapid, 
though  accurate  manipulations  of  promoters,  projectors,  and  wreckers, 
and  the  dispiriting  influence  of  receivers,  their  stocks  and  bonds  have 
disappeared  like  a  morning  mist  ;  and  they  hold  the  East  accountable 
for  the  transformation.     The  reckoning  has  just  begun. 

"  Under  their  direction  Congress  gave  to  railways  of  their  patrimony 
millions  of  acres  of  the  most  productive  land  that  ever  invited  plow 
and  seed,  but  that,  too,  has  gone  and  left  no  other  trace  behind  it 
than  the  advantage  of  general  development,  and  they  look  in  vain  to 
see  any  perceptible  diminution  in  interest-bearing  obligations  by 
reason  of  this  magnificent  endowment,  and  they  hold  the  East  ac- 
countable for  that.  They  saw  that  the  prime  motive  of  those  who 
originated  and  carried  forward  substantially  every  road  built  through 
the  State  was  not  a  fair  return  for  the  carriage  of  freight  and  passen- 
gers, but  their  own  immediate  enrichment,  and  they  do  not  discern 
the  difference  between  present  and  past  proprietors.  Year  after  year 
they  were  witnesses  of  a  system  of  discrimination  which  paralysed 
their  industries,  and  for  which  it  was  hard  to  find  even  a  shadow  H 
justification,  and  they  hold  somebody  accountable  for  that." 


CONTROVERSIES.  29 

But  the  greatest  abuse  and  wrong  brought  about 
by  the  issue  of  watered  stock  and  bonds  by  rail- 
roads, gas  companies,  telegraph,  telephone,  electric- 
light  companies,  water-works,  and  other  {//fasi-[)uhlic 
corporations  remain^o  be  stated.  The  people  have 
given  to  these  corporations  valuable  franchises ;  have 
permitted  them  to  take  land  arbitrarily  upon  pay- 
ment therefor ;  have  empowered  them  to  collect 
tolls  ;  have  limited  the  liability  of  the  stockholders  ; 
and  have  excluded  all  outside  parties  from  placing 
cars  on  the  tracks  of  a  railroad,  although  those  tracks 
are  public  highways.  In  exchange  for  all  this,  the 
people  have  a  right  to  expect  that  the  charges  for 
service  shall  be  reasonable  and  low ;  that  such  charges 
shall  not  be  such  as  to  pay  extravagant  profits  on 
the  actual  cost  of  the  property,  and  that  w^hen,  by 
increase  of  population,  the  profits  become  great, 
then  that  the  rates  shall  be  reduced.  All  this  is 
what  the  people  have  a  right  to  demand,  and  yet  all 
this  is  what  the  corporations  prevent  from  taking 
place  by  issuing  watered  stock  and  bonds. 

This  is  the  greatest  of  all  objections  to  watered 
stock  and  bonds.  They  are  issued  to  represent  thel 
future  increase  in  the  earning  power  of  a  public  fran- 
chise. A  public  franchise  owned  by  a  corporation 
increases  in  its  profit-earning  capacity  with  the  in- 
crease of  population.  This  increased  value  is  due  to 
the  franchises  which  the  people  have  given  away  to 
the  corporations.  The  people  are  entitled  to  the 
benefits  of  that  increase,  and  it  could  be  readily  se- 
cured to  the  people  by  a  reduction  of  charges.  But 
by  stock  dividends,  based  on  this  increased  value  of 
the  franchise,  the  railroad  is  able  to  divide  all  profits 


30  THE   CORPORATION   PROBLEM. 

and  yet  not  declare  more  than  a  six  or  eight  per  cent, 
dividend.  The  smallness  of  the  dividend  prevents  a 
legislative  reduction  of  rates.  If,  however,  no  stock 
dividend  were  allowed,  and  the  large  profits  of  the 
increased  earning  capacity  were  employed  in  improv 
ing  the  property  or  in  making  extravagant  dividends, 
a  reduction  of  rates  would  be  inevitable. 

In  reply  to  this  view,  however,  it  is  urged,  and  with 
some  force,  that  about  three  out  of  four  railroad  en- 
terprises are  a  total  loss  to  their  projectors,  and  that 
the  fourth  should  be  made  to  pay  more  largely,  by 
reason  of  the  risk  incurred.  It  is  also  urged  that 
large  capital  and  great  ability  in  managing  enter- 
prises of  such  magnitude  should  be  richly  compen- 
sated, and  that  if  the  compensation  be  taken  away 
railroads  will  not  be  built. 

Alexander  says  with  much  force : 

"  It  is  asserted  that  much  of  the  stock  of  our  railroads  is  not  legiti- 
mate, but  is  water.  Such  an  argument  may  apply  against  any  par- 
ticular railroad  that  earns  exorbitant  dividends,  but  against  the  system 
as  a  whole  it  does  not.  For  it  would  be  easy  to  show  that  for  every 
dollar  of  water  in  existing  stocks,  two  dollars  of  the  money  of  railroad 
investors  has  been  lost  like  water  spilt  in  the  sand.  Much  of  it  was  lost, 
doubtless,  by  bad  judgment  ;  but  the  fact  remains  that  our  existing 
system  of  railroads,  as  a  whole,  has  cost  fully  as  much  as  it  is  capital- 
ized at.  Scarcely  one  of  them  was  originally  built  as  it  stands  to-day. 
The  earlier  ones  have  been  rebuilt  and  re-equipped  three  or  four 
times,  as  experience  pointed  out  necessary  improvements.  Many  of 
them,  too,  were  built  before  the  business  really  demanded  them,  and 
the  loss  from  this  source  has  been  enormous.  ...  If  the  State 
would  guarantee  the  interest  upon  money  legitimately  invested  in  rail- 
road construction,  investors  would  readily  furnish  all  that  might  be 
desired,  and  railroads  could  and  would  be  built  without  watered 
stock.  But  the  State  very  properly  refuses  to  assume  any  risk,  and 
leaves  it  to  be  borne  entirely  by  the  investor.     The  latter,  then,  hav- 


CONTROVERSIES.  3 1 

ing  all  the  risk,  naturally  demands  to  have  also  all  the  chances  of 
profit  if  the  road  turns  out  a  success.  He  discounts  the  future,  and 
takes  watered  stock  to  represent  what  he  hopes  will  be  his  earnings. 
That  is  the  only  way  that  communities  wanting  railroads  can  induce 
investors  to  supply  the  funds.  .     .     l!ut  I  record  my  conviction 

that  the  practice  of  stock-watering  shoulil  be  prohibited,  without  much 
hope  of  ever  seeing  it  done,  and  more  on  the  grouml  that  it  is  against 
public  policy  to  make  it  easy  for  men  to  buiUl  railroads,  or  float  any 
enterprises  with  t)ther  people's  money,  than  from  the  fear  of  railroads 
being  enablei,!  to  practise  extortion  by  the  possession  of  watered 
stock."  ' 

And  Swann  presents  an  ingenious  argument  on 
this  question  when  he  says  : 

**  The  assertion  by  a  State  of  a  right  to  fix  rates  and  limit  dividends 
by  ex-post-facto  legislation,  without  regard  to  existing  charters  and 
without  compensation  or  indemnity,  is,  in  fact,  the  barely  disguised 
assertion  of  a  right  to  confiscate  to  a  greater  or  less  extent  the  incre- 
ment of  value  legitimately  accruing  to  a  going  concern.  In  connec- 
tion with  a  railroad  the  increment  of  value  cannot  with  any  semblance 
of  propriety  be  described  as  an  '  unearned  *  increment.  In  a  vast 
number  of  instances  an  American  railroad  may  be  said  to  create  the 
settlement  of  population  which  is  destined  to  furnish  passengers  and 
produce  freight.  Reflex  activities  are  of  course  stimulated,  and 
contribute  in  their  turn  to  the  development  of  traffic  ;  but  in  many 
instances  the  railroad  itself  primarily  constitutes  the  determining 
condition  of  settlement  in  a  particular  place,  and  of  the  transporta- 
tion of  passengers  and  merchandise  through  a  particular  channel. 
Subject  to  the  restraints  of  equitable  regulation,  the  right  of  a  con- 
structing company  to  the  increasing  benefit  of  the  business  which  it 
builds  up  by  its  outlay  and  its  skill  is  no  less  real  than  that  of  the 
founder  of  a  purely  commercial  or  professional  business  to  the  in- 
creasing benefit  of  his  capital  or  ability."  ' 

'  Alexander  on  "  Railway  Practice,"  p.  37. 

*"  Investor's  Notes  on  American  Railroads,"  p.  42. 

Atkinson  on  "  The  Distribution  of  Products,"  2d  ed.,  1885,  p.  259, 
says  :  "  The  elimination  of  what  has  been  called  *  watered  stock 
and  bonds,"  against  which  the  silly  crusade  of  the  so-called  anti- 


32  THE   CORPORATION   PROBLEM. 

Although  it  is  easy  to  point  out  the  evil,  it  is  diffi- 
cult to  point  out  a  remedy.  Constitutional  provisions, 
declaring  watered  stock  and  bonds  to  be  void,  have 
been  enacted  in  Pennsylvania,  Illinois,  Nebraska, 
Alabama,  and  other  States.  But  such  a  law  does  not 
accomplish  the  desired  result.  The  courts  will  not 
enforce  it.  They  nullify  it  by  judicial  construction. 
The  remedy  is  so  sweeping  in  its  effects  and  so  dis- 
astrous to  innocent  holders  of  corporate  securities, 
that  the  courts  uphold  the  watered  stock  and 
bonds.     The  fault  is  in  the  remedy  itself.     It  seeks 


monopolists  has  been  directed,  is,  therefore,  in  process  of  accomplish- 
ment by  methods  far  more  potent  than  any  possible  legislative  acts, 
namely  by  the  triple  competition  of  :  water-ways  ;  second,  the  com- 
petition of  one  railway  with  another  ;  third,  the  competition  of 
product  with  product  in  the  great  markets  of  the  world." 

The  Railroad  Gazette  of  June  27,  1890,  speaking  of  the  charge  that 
sliippers  are  charged  an  unnecessary  amount  in  order  to  pay  divi- 
dends on  watered  stock  and  to  cover  liabilities  on  unprofitable  sec- 
tions of  railroad  or  unwise  lines  of  business  in  which  the  company- 
has  engaged,  says : 

"  The  objection  concerning  dividends  on  watered  stock  needs  but 
brief  notice.  '  My  dear  boy,'  said  the  minister,  '  don't  you  know 
that  it  is  wrong  to  catch  fish  on  Sunday  ? '  The  boy  looked  sadly 
at  his  basket  and  simply  said,  '  Who 's  catching  any  fish?'  The 
whole  theory  that  a  railroad  man  makes  his  rates  high  because  he 
has  high  nominal  capital,  or  large  outside  burdens,  or  unprofitable 
branch  lines,  has  no  relation  to  the  facts.  The  roads  with  the  lowest 
rates  are  quite  generally  those  that  are  apparently  worst  off  in  these 
respects.  The  Baltimore  &  Ohio  does  not  charge  high  rates  on 
account  of  its  branch  lines,  nor  the  Erie  on  account  of  its  water. 
They  must  charge  rates  low  enough  to  keep  their  lines  profitably 
occupied  with  traffic,  and  they  do,  in  fact,  charge  very  low  ones." 

The  New  York  Evenuig  Post  says  : 

**  When  a  new  road  has  brought  settlers  and  given  value  to  farm 
lands  or  village  lots  otherwise  worthless,  it  is  not  correct  to  say  that 


CONTROVERSIES.  33 

to  cure  the  evil  after  the  evil  is  done  rather  than  to 
prevent  its  occurrence. 

It  is  beheved  by  the  author  tliat  there  is  but  one 
way  of  preventing  the  issue  of  watered  stock  and 
bonds.  The  hiw  should  prohibit  all  issues  of  stock 
or  bonds  for  labor,  property,  or  contract  work,  unless, 
before  such  issue,  it  shall  have  been  decided  by  a 
court  or  State  commissioners  that  the  labor,  property, 
or  contract  work  so  received  is  equal  in  value  to  the 
par  value  of  the  stock  and  bonds  issued  for  it.' 

the  *  increment'  in  its  own  value,  produced  through  the  increasing 
traffic,  is  *  unearned,'  for  in  a  commercial  sense  the  road  has  itself 
created  the  business  from  which  both  farm  and  railway  vahies  spring. 
The  same  is  true  to  a  certain  extent  of  oKlcr  States  also.  A  single 
illustration  may  be  given.  The  census  of  1880  gives  the  average 
value  of  improved  land  in  Central  Illinois  at  less  than  $37  per  acre. 
The  report  of  the  Illinois  Board  of  Agriculture  for  1890,  in  its  esti- 
mates of  cost  of  production  for  the  various  crops,  puts  the  use  of  land 
at  $3.68  per  acre,  or  a  valuation  of  not  less  than  $50.  Making 
allowance  for  any  over-estimate  by  the  Board,  it  is  probable  that  the 
farming  lands  of  Illinois  have  increased  in  value  20  or  25  per  cent, 
during  the  decade.  An  increase  in  railroad  dividends  during  this 
period  would,  therefore,  only  show  a  profit  corresponding  to  other 
enterprises  in  the  State  ;  and  if  made  through  an  issue  of  unpaid 
stock,  might  still  be  without  prejudice  to  any  farmer's  interest. 

*'  But  all  stock-watering  is  not  as  innocent  as  this.  There  are 
many  instances  in  our  railroad  history  where  issues  of  share  capital 
liave  been  so  made  as  to  give  large  and  illegitimate  gains  to  the 
(>;»erators,  or  else  to  turn  control  of  a  railway  over  to  men  who  have 
paid  little  or  nothing  for  it." 

'  Attorney-General  Leese  of  the  State  of  Nebraska,  in  his  report  to 
the  Governor,  December,  1890,  voices  the  radical  sentiment  of  that 
State  when  he  says  : 

"  The  rates  charged  to-day  are  large  enough  to  yield  a  dividend 
amounting  in  some  cases  to  8  per  cent,  on  stock  tliat  cost  the  stock- 
holders nothing  whatever  but  the  printing  ;  and  the  officers  of  these 
roads  use  every  effort  and  strain  every  point  to  have  the  stockholders 


34  THE   CORPORATION   PROBLEM. 

DISCRIMINATIONS  BETWEEN  INDIVIDUALS REBATES  AND 

SECRET    RATES. 

It  was  a  principle  of  the  old  Anglo-Saxon  law  that 
a  common  carrier  must  not  charge  one  person  more 
than  it  charged  another  person  for  the  same  service. 
This  principle  runs  far  back  into  English  history  and 
English  common  law.  It  was  applied  to  stages  and 
canals,  and  in  these  latter  days  it  has  been  applied 
to  railroads.     It  is  the  public  duty  of  a  public  carrier. 

Notwithstanding  this,  the  American  railroads,  for 
many  years,  have  discriminated  between  individuals. 
They  have  given  secret  reductions,  rebates,  and  ad- 
vantages to  the  large  or  favored  shipper.    The  extent 

of  their  roads  receive  their  annual  dividends,  and  they  have  to  do 
this  to  hold  their  jobs.  It  is  a  notorious  fact  that  the  roads  in  Ne- 
braska are  now  openly  violating  the  plain  provision  of  our  funda- 
mental law  embodied  in  section  5  of  article  2  of  the  constitution, 
which  provides  that  no  corporation  shall  issue  any  bonds  or  stock 
except  for  money,  labor,  or  property  actually  received  and  applied  to 
the  purpose  for  which  the  corporation  was  created,  and  that  all  stock 
dividends,  and  other  fictitious  increase  of  capital  stock  or  indebted- 
ness of  any  such  corporations  shall  be  void.  It  is  an  admitted  fact 
that  the  railroads  in  this  city  have  outstanding  stock  to  a  very  large 
amount  that  has  not  been  issued  for  money,  labor,  or  property,  and 
the  several  reports  of  these  roads  show  dividends  on  all  such  stock. 

"  I  would  recommend  a  law  forbidding  any  railroad  corporation 
from  issuing  any  mortgage  bonds  or  stock  until  an  itemized  account 
of  the  cash,  labor,  or  property,  duly  sworn  to,  has  been  presented  to 
some  officer  of  the  State  for  examination,  and  if  found  to  be  a  true 
account  of  the  money,  labor,  or  property  received,  to  register  and 
certify  to  the  same  as  issued  in  pursuance  of  law,  and  as  constituting 
a  part  of  the  capital  stock  of  such  corporation.  Such  a  law  would 
strike  out  all  fictitious  increase  of  capital  stock  of  all  roads  now  in 
operation  as  well  as  those  to  be  formed  hereafter." 

On  the  other  hand  the  report  of  the  Railroad  Commissioners  of 


CONTROVERSIES.  35 

of  these  discriminations  was  unsuspected  until  the 
Hepburn  investigating  committee  in  New  York  some 
eleven  years  ago  disclosed  over  six  thousand  illegal 
discriminations  by  the  New  York  Central  Railroad 
alone. 

"At  one  time,  when  a  legislative  investigation  was  ordered,  there 
were  in  existence  on  the  line  of  the  New  Vork  Central  Railroad 
upward  of  6,CKX>  different  contracts  varying  in  the  most  arbitrary 
manner  the  published  schedule  rate  for  the  carriage  of  local  freights. 
.  .  .  They  were  granted  as  the  caprice,  the  whim,  or  the  interest 
of  the  railway  freight  agent  dictated  at  the  hour."  ' 

Under  such  a  system  as  this,  permeating  as  it  did 
the  whole  railroad  traffic  of  America,  business  be- 
came utterly  demoralized.     No  merchant  knew  what 

Kansas  states  that  the  Chicago,  Kansas,  &  Nebraska  Railroad 
Company,  comprising  1,388  miles,  cost  for  road  and  equipment 
$21,083  per  mile;  that  there  is  no  "water"  in  this  cost;  and 
that  the  Kansas  lines  as  a  whole  have  cost  more  than  this.  "It 
is  quite  common,  however,  for  inflated  orators  to  assert  that  from 
$8,000  to  $10,000  per  mile  is  all  that  a  railroad  legitimately  costs 
and  that  all  capitalization  above  that  is  water."  The  Board  then 
shows  that  during  the  year  the  total  net  income  of  all  Kansas  roads 
sufficed  to  pay  4J  per  cent,  upon  the  bonded  debt,  leaving  the  stock 
out  of  the  account  entirely.  The  Board  adds  :  "A  railroad  thrown 
down  upon  the  prairie  at  a  cost  of  $10,000  or  $12,000  per  mile  is  no 
criterion  of  the  cost  of  a  road  over  which  immense  trains  run  with 
safety  thirty  or  forty  miles  an  hour." 

'  "  Encyclopedia  of  Political  Science,"  vol.  iii.,  p.  519. 

For  a  very  full  and  detailed  statement  of  the  manner  in  which 
special  rates,  rebates,  drawbacks,  underbilling,  and  reduced  classifica- 
tions were  granted  by  railroads  to  favored  shippers,  prior  to  the  In- 
terstate Commerce  Act,  see  the  first  annual  report  of  the  Interstate 
Commerce  Commission,  pages  5-7. 

Concerning  the  existing  practices  of  the  English  railways  in 
allowing  rebates  and  underbilling,  see  an  article  from  The  Financial 
Times  in  8  Ry.  &  Coq).,  L.  J.,  519  (1890). 


36  THE   CORPORATION   PROBLEM. 

rate  his  competitor  was  obtaining.  He  merely  knew 
that  the  rate  was  a  secret  reduction,  and  that  he  also 
must  obtain  a  reduction  in  order  to  meet  competi- 
tion. Every  wholesale  concern  had  its  expert  manipu- 
lator and  negotiator  to  look  after  the  railroad  rebates 
and  secret  rates.  It  was  a  contest  in  which  the  prize 
was  won  by  the  keen  and  unscrupulous.  Favoritism, 
bribery,  and  corruption  of  railroad  agents  were  the 
order  of  the  day.  As  a  result,  the  most  favored 
business  house  crushed  out  the  competing  concerns. 
The  great  shipper  demanded  and  obtained  the  great- 
est rebates,  under  threat  of  giving  all  his  business 
to  a  competing  railroad.  The  railroads  themselves 
began  to  be  devoured  by  the  evil  which  they  .had 
created.  As  for  the  small  shipper,  the  legal  principle 
that  rates  should  be  the  same  for  all  persons  became 
a  mockery.  Power,  fear,  and  corruption  were  the 
forces  that  had  displaced  the  law.  It  was  out  of 
such  a  maelstrom  of  secret  discriminations  as  this 
that  the  Standard  Oil  Company  arose.  That  com- 
pany did  a  shipping  business  of  millions  of  dollars 
annually.  It  gave  its  business  to  the  railroad  that 
gave  the  greatest  reductions,  rebates,  and  secret  dis- 
criminations. It  is  no  wonder  that  competing  oil 
refiners  were  ruined.  Not  only  did  the  Standard 
Oil  Company  demand  a  rebate  on  its  own  shipments, 
but  it  had  the  unparalleled  impudence  to  demand  a 
rebate  on  shipments  made  by  its  competitors.  ^ 
Professor  Richard  T.  Ely  has  said  : 

^  Lest  this  statement  should  seem  incredible,  reference  is  made  to 
the  opinion  of  Judge  Baxter  of  the  United  States  Circuit  Court  in 
Handy  vs.  Cleveland,  &c.,  R.  R.  Co.,  31  Fed.  Rep.,  689  (1887). 


COXTROVERSIES.  37 

"  It  is  stated  that  even  such  delay  in  shipment  and  such  annoyance 
as  a  railway  can  inflict  on  a  business  man  not  in  favor,  is  at  times 
sufficient  to  cause  his  bankruptcy.  All  this  involves  immense  waste 
of  economic  resources.  Talent  in  business,  accumulation  of  capital 
in  various  forms,  and  organizations  extending  over  a  wide  area,  all 
of  which  ought  to  have  been  a  blessing  to  the  laboring  population 
and  the  entire  countr)',  are  annihilated.  The  best-known  example  is 
the  Standard  Oil  Company.  It  received,  as  already  stated,  $10,000,- 
000  in  eighteen  months  in  rebates.  If  it  had  done  business  at  what 
would  have  been  cost  for  others,  it  would  still  have  had  that  enor- 
mous sum  as  profit.  If  it  had  transacted  its  business  at  such  terms 
as  would  have  involved  the  loss  of  $5,000,000  for  others  on  the  same 
amount  of  business,  there  would  still  have  been  an  equal  sum  for 
distribution  among  the  members  of  the  company.  It  is  a  matter  of 
course  that  its  competitors  were  ruined,  and  idle  factories,  old  pipe 
lines  no  longer  used,  and  business  wrecks  throughout  the  country 
give  evidence  of  enormous  economic  waste.  .  .  .  At  the  time  of 
the  investigation  of  the  New  York  Hepburn  Committee,  .it  was 
found  that  special  rates  were  the  rule,  and  the  regular  tariff  existed 
only  for  the  weak  and  inexperienced."  ' 

Ex-Governor  Larrabee,  of  Iowa,  has  said  in  refer- 
ence to  discriminations  in  Iowa : 

"It  was  from  the  first  the  policy  of  Iowa  to  encourage  railroad  con- 
struction. Favorable  laws,  land-grants,  subsidy  taxes,  and  liberal 
donations,  all  contributed  to  make  this  State  an  El  Dorado  for  rail- 
road builders.  More  than  fifty  million  dollars  in  value  was  donated 
to  aid  in  the  construction  of  the  Iowa  lines.  In  no  other  State  have 
those  who  own  the  railroads  paid  a  smaller  proportion  of  the  cost  of 
their  construction  than  here.  This,  however,  seemed  to  have  but  little 
weight  with  railroad  managers.  Iowa  has  no  great  city  interest  to 
protect  her  shippers  against  their  rapacity,  and  the  chiefly  agricultu- 
ral regions  have  always  been  singled  out  by  them  for  the  recouping 
of  losses  sustained  by  perilous  competition  in  large  business  centres. 
Our  farmers,  miners,  manufacturers,  and  jobbers  were  alike  made 
the  victims  of  a  stupendous  system  of  discrimination.     In  many  por- 

'  Harper  s  Ma^azitu-,  August,  1 886. 


38        THE  CORPORATION  PROBLEM. 

tions  of  the  State  the  freight  to  Chicago  on  grain  and  cattle  M^as  from 
50  to  80  per  cent,  higher  than  from  points  west  of  the  Missouri  River. 
Minneapolis  millers  were  enabled  to  import  wheat  from  Dakota, 
manufacture  flour  from  it,  and  undersell  at  his  own  home  the  Iowa 
miller,  who  received  his  grain  from  the  same  source  by  a  direct  route. 
Davenport  shippers  found  it  to  their  advantage  to  have  their  West- 
bound freight  carried  across  the  Mississippi  and  shipped  from  Rock 
Island.  It  cost  $130  to  have  a  car-load  of  wheat  hauled  from  West- 
ern to  Eastern  Iowa,  and  only  half  as  much  to  have  it  hauled  twice 
as  far,  to  Chicago.  Iowa  jobbers,  owing  to  the  difference  in  rates, 
were  undersold  by  their  Chicago  rivals  in  nearly  every  town  and 
hamlet  in  the  State.  Illinois  coal  could  be  carried  500  miles  from 
its  place  of  origin  and  sold  with  profit  almost  in  the  very  heart  of 
Iowa,  and  within  fifty  miles  of  our  coal-beds.  .  .  .  No  one 
could  engage  in  certain  lines  of  business  with  any  prospect  of  success 
without  the  permission  of  the  railroad  authorities,  and  this  one  could 
not  obtain  without  incurring  the  obligation  of  serving  them  in  one 
way  or  another. 

"  Leading  papers  of  both  political  parties  were  either  owned  or 
subsidized  by  railway  managers,  and  corporate  favors  were  even 
extended  to  publishers  of  cross-road  papers  who  were  disposed  to 
criticise  existing  abuses.  Annual  passes  were  given  to  all  State  and 
county  officers,  executive,  legislative,  and  judicial ;  to  all  prominent 
politicians  ;  and  in  some  instances  even  to  township  assessors  and 
jurymen.  Railroad  power  made  itself  felt  everywhere  ;  every  shipper 
realized  it.  Men  of  energy  and  self-reliance  would  fail  in  business, 
while  railroad  favorites  accumulated  a  fortune  in  a  few  years.  The 
rules  which  had  always  controlled  trade  seemed  to  be  inverted." 

At  length  the  system  became  intolerable.  Busi- 
ness men  could  not  calculate  as  to  the  future,  nor  be 
certain  even  of  the  present.  Small  concerns  were  fast 
going  to  the  wall.  Great  monopolies  were  arising. 
Courts  and  lawsuits  were  slow,  tedious,  and  expen- 
sive.    Something  had  to  be  done. 

Many  of  the  States  enacted  radical  and  stringent 
prohibitions  against  discriminations.      In  this  move- 


CONTROVERSIES.  39 

ment  New  York  designed  the  j)lan,  and  the  Western 
States  very  quickly  adopted  it.  ' 

But  even  this  was  insufficient.  The  Supreme  Court 
of  the  United  States  held  that  such  a  State  law 
could  not  regulate  traffic  coining  into  or  going  out 
of  the  State — In  other  words,  could  not  regulate 
interstate  traffic.  When  this  decision  was  an- 
nounced, it  became  clear  that  Congress  must  deal 
with  the  problem.  Hence  it  was  that  the  Inter- 
state Commerce  Act  was  enacted.  By  this  act  dis- 
criminations of  all  kinds  were  prohibited  ;  and  such 
is  now  the  law  of  the  land.  Nevertheless  the  Inter- 
state Commerce  Act  has  not  cured  the  evil.  This 
subject,  however,  is  considered  elsewhere.' 

'  Hudson  in  his  work  on  "  Railways  and  the  Republic,"  p.  362,  says 
in  regard  to  the  Hepburn  investigations  : 

"  It  was  the  result  of  a  searching  investigation  which  occupied 
nearly  eight  months.  The  committee  took  some  five  thousand  pages 
of  testimony,  made  a  report,  which  was  recognized  as  one  of  the 
ablest  presentations  of  this  question  yet  given  to  the  public,  and 
accompanied  it  by  bills  which  were  embodied  in  the  New  York  anti- 
discrimination bill  of  iSSo.  The  essential  provisions  of  this  bill 
were :  First,  requiring  pul)licity  of  rates.  Second,  prohibiting 
preferential  rates.  Third,  prohibiting  drawbacks  and  rebates. 
Fourth,  enacting  that  no  more  should  be  charged  for  a  shorter  haul 
than  for  a  longer  one  over  the  same  line.  Fifth,  declaring  pools 
illegal,  and  sixth,  establishing  a  board  of  commissioners  to  see  that 
these  provisions  are  enforced,  to  investigate  complaints,  and  to  secure 
justice  between  shippers  and  carriers." 

Alexander  on  "  Railway  Practice,"  however,  takes  the  following 
view  on  this  question  (p.   59)  : 

Discrimination  between  individuals  "can  only  be  abolished  by 
removing  the  temptation  to  commit  it.  This  can  only  be  done  by 
division  of  territor)',  by  pooling,  or  by  consolidation." 

'  In  regard  to  the  English  Act  of  Parliament  prohibiting  railroads 
from  giving  better  rates  to  one  description  of  traffic  or  one  person 


40  THE   CORPORATION   PROBLEM. 

DISCRIMINATIONS    BETWEEN    TOWNS — CHARGING    MORE 
FOR    A    SHORT    THAN    FOR    A    LONG    HAUL. 

.  Discriminations  against  individuals  have  already 
been  explained.  A  second  class  of  discriminations 
is  that  of  discriminations  against  one  town  as  com- 
pared with  another  town.  These  two  methods  of 
discrimination  are  equally  bad,  and  yet  are  different 
in  their  character.  The  former  w^ere  secret,  the  latter 
were  open ;  the  former  were  by  reductions,  rebates, 
and  underweighing,  while  the  latter  were  by  char- 
ging more  for  hauling  freight  to  a  town  near  at  hand 
than  to  a  town  far  away.  For  instance,  the  railroads 
charged  more  for  hauling  a  car-load  of  freight  from 
Chicago  to  Pittsburgh  than  they  did  for  hauling  the 
same  freight  from  Chicago  right  through  Pittsburgh 
on  to  New  York.  The  charge  was  greater  for  the 
short  haul  than  for  the  long  haul,  and  Pittsburgh 
was  discriminated  against. 

Why  was  this  ?  It  was  because  the  railroads  had 
a  monopoly  at  Pittsburgh,  but  not  at  New  York. 
The  ocean,  the  Erie  Canal,  and  a  half  dozen  trunk 
lines  of  railroads  created  a  competition  at  New  York 
that  led  to  low  rates.  But  Pittsburgh,  like  many 
another  American  town  in  the  interior,  was  at  the 
mercy  of  the  railroads,  and  the  railroads  used  their 
powder.     They  combined  to  keep  up  the  rates.     The 

than  another,  Jeans  on  "  Railway  Problems,"  p.  521,  says  :  "  It  is  not 
pretended  that  these  enactments  have  been  scrupulously  observed. 
On  the  contrary,  they  are  broken  every  day,  by  nearly  every  railvi^ay 
company  in  the  country.  Their  strict  observance  has,  in  effect,  been 
declared  to  be  impossible,  even  by  Commissioners  and  Committees 
appointed  to  inquire  into  their  operation." 


CONTROVERSIES.  4I 

same  thing  happened  also  in  numberless  villages  and 
towns  that  had  but  one  railroad.  That  railroad  had 
a  monopoly,  and  took  advantage  of  it  by  imposing 
high  rates. ' 

Hence  the  pernicious  practice  arose  of  charging 
high  rates  wherever  the  railroads  had  a  monopoly 
and  low  rates  where  they  did  not  have  a  monopoly, 
even  though  the  haul  to  the  former  place  was  very 
much  shorter  than  the  haul  to  the  latter  place.' 

Mr.  Acworth,  the  English  writer,  gives  an  instance 
of  charging  more  for  a  short  than  for  a  long  haul  as 
follows : 

"  An  Oriental  despot,  a  Baber  or  an  Aurungzebe,  did  not  make 
and  unmake  cities  with  a  more  absolute  and  irresistible  power  than  an 
American  railway  king.  Few  campaigns  in  history  have  been  more 
momentous  than  the  great  '  Rate  War,'  fought  by  the  New  York 
Central  under  Vanderbilt,  and  the  Erie  under  Jewett,  to  protect  the 
ocean  trade  of  New  York  against  the  encroachments  of  Baltimore  and 
Philadelphia.  But  those  wars  could  only  Have  been  carried  on — and 
even  now  they  are  not  altogether  things  of  the  past — on  condition 
that  the  local  stations  furnished  the  sinews  of  war.  Chicago  possibly 
gained  by  sending  its  wheat  to  the  seaboard  at  7^.  a  ton,  but  the  inter- 
mediate points,  which  simultaneously  were  paying  perhaps  five  or  six 
times  as  much,  unquestionably  suffered.  We  are  often  told  that  the 
American  railways  have  ruined  the  English  farmer  ;  people  forget 
that  they  have  ruined  the  American  farmer  also.     Between  1870  and 


'  For  instance,  the  railroads,  prior  to  the  Interstate  Commerce  Act, 
gave  Council  Bluffs  a  rate  of  from  $25  to  IL4.5  per  car  to  Chicago  on 
hogs  and  cattle,  while  other  Iowa  towns  on  these  same  roads  were 
forced  to  pay  II70  per  car  for  a  less  service. 

'  "  On  the  first  day  of  January,  1887,  there  were,  according  to  the 
Chief  of  the  Bureau  of  Statistics,  33,694  railroad  stations  in  the 
United  States,  of  which  2,778  were  junction  points,  /.  ^. ,  are  points 
where  there  are  more  than  one  railroad,  leaving  30,916  stations  where 
there  is  but  one  railroad." — Senator  Cullom's  speech,  January,  1887. 


42  THE   CORPORATION   PROBLEM. 

1880,  in  spite  of  an  increased  area  of  two  million  acres  under  cultiva- 
tion, agricultural  land  in  the  State  of  New  York  alone  depreciated  in 
value  to  the  extent  of  ;^45, 000,000  sterling.  And  all  this  while  the 
American  people  looked  on  and  did  nothing — it  cannot  be  said  they 
made  no  attempt — to  stop  it."  ' 

The  railroads  have  an  ingenious  defence  for  this 
practice  of  charging  more  for  a  short  haul  than  for  a 
long  haul.  They  argue  that  at  points,  like  Chicago, 
water  competition  makes  rates  very  low — so  low,  in 
fact,  that  the  railroads  can  make  a  very  small  profit 
at  that  rate,  but  not  profit  enough  to  pay  interest  or 
dividends.  Hence  the  railroads  ask,  shall  we  lose 
the  business  and  make  no  profit  at  all,  or  shall  we  do 
the  business  at  a  very  low  profit  and  rely  upon  our 
business  at  other  points  to  pay  interest  and  dividends  ? 
Better,  they  say,  get  a  small  profit  than  no  profit 
at  all. 

This  argument  is  plausible.  But  it  is  unjust  and 
unsound,  and  for  two  reasons.  First,  the  railroads, 
when  allowed  to  discriminate  at  all,  abuse  their 
power.  The  luckless  town  wherein  they  have  a 
monopoly  is  subjected  to  extortionate  rates — rates 
as  high,  in  fact,  as  can  be  paid.  Second,  if  a  fair 
share  of  interest  and  dividends  on  the  railroads  can- 
not be  obtained  from  business  between  points  having 
water  communication,  then  let  the  traffic  go  by  water. 
It  is  a  natural  law  of  commerce  that  the  cheapest 
mode  of  service  shall  survive.  Railroads  are  not 
justified  in  exacting  their  interest  charges  and  divi- 
dends from  one  town,  and  at  the  same  time  carrying 
traffic  from  another  town  at  a  price  that  pays  a  very 


1  << 


The  Railways  and  the  Traders,"  p.  221. 


CONTROVERSIES.  43 

small  part  of  interest  charges  and  no  dividends  at  all. 
Unless  a  fair  profit  can  be  made,  the  business  should 
stop  and  the  legitimate  tendencies  of  trade  be  allowed 
to  prevail.' 

Least  of  all  is  there  any  defence  for  a  discrimina- 
tion between  an  interior  town  having  two  railroads 
and  a  town  having  but  one  railroad.  If  competition 
reduces  rates  at  the  former  place  so  as  to  prevent  a 
fair  price  being  charged,  this  is  the  fault  of  the  rail- 
roads themselves,  and  should  not  excuse  higher  rates 
at  the  latter  place.  It  is  no  excuse  for  one  railroad 
to  say  that  the  others  are  cutting  rates,  and  that 
consequently  it  will  reduce  rates  at  the  competitive 
point,  but  nowhere  else.' 

'  The  Interstate  Commerce  Commission,  in  its  second  annual 
report,  p.  15,  says,  concerning  this  subject  :  "It  can  hardly  be 
for  the  public  good  that  carriers  by  water  should  be  subjected  to 
unreasonable  and  excessive  competition  ;  they  ought,  as  much  as  the 
carriers  by  rail,  to  be  allowed  to  charge  remunerative  rates  ;  and  the 
carrier  by  rail  does  not  therefore  make  out  a  complete  case,  when 
called  upon  to  justify  extraordinary  differences  between  his  rates  at  a 
point  of  water  competition  and  at  other  points,  when  he  shows  that  at 
the  former  he  made  the  very  low  rates  because  otherwise  he  would 
not  have  obtained  the  business.  It  may  be  that  when  the  case  is 
examined  in  the  light  of  the  public  interest  it  will  be  manifest  that  he 
ought  not  to  have  had  it  ;  that  in  taking  it  he  had  pressed  the  compe- 
tition to  an  extreme  which,  while  it  harmed  the  carrier  by  boat,  was 
harmful  also  to  points  on  the  railroad  by  reason  of  the  great  disparity 
in  rates  which  it  created,  and  also  because  of  its  producing  so  little 
revenue  that  the  burden  upon  other  traffic  was  increased  in  conse- 
quence." 

For  the  opinion  in  general  of  the  Interstate  Commerce  Commission 
on  this  subject  of  discrimination  against  towns,  see  the  first  annual 
report,  p.  7. 

'  By  far  the  ablest  presentation  of  the  right  of  railways  to  discrimi- 
nate against  places  is  presented  by  Mr.  Alexander,  in  his  work  on 


44  THE   CORPORATION   PROBLEM. 

Discriminations  against  places — charging  more  for 
a  short  haul  than  for  a  long  haul — finally  roused  to 
action  the  people  of  the  towns  and  States  that  were 
discriminated  against.  Statutes  were  passed  pro- 
hibiting these  discriminations.  As  already  stated, 
the  Supreme  Court  of  the  United  States  declared 
the  statutes  unconstitutional,  so  far  as  they  applied 
to  interstate  commerce.  Congress  was  then  called 
upon  to  remedy  the  evil,  and  the  Interstate  Com- 
merce Act,  which  had  been  before  Congress  in  many 
shapes  and  for  many  years,  was  finally  passed.  It 
prohibits  an  interstate  railroad  from  charging  more 
for  a  short  haul  than  for  a  long  haul,  under  sub- 
stantially the  same  conditions.  To  a  certain  extent 
this  act  is  being  enforced.  As  will  be  shown  here- 
after, however,  this  act  has  not  and  cannot  accomplish 
that  which  is  expected  from  it. 

"  Railway  Practice,"  pp.  8-10  (1887).  His  argument  is  that  Nature 
has  discriminated  against  places,  and  that  railroads  are  continually 
decreasing  that  discrimination.  Discrimination  ' '  is  almost  universally 
the  result  of  natural  features  or  geographical  locations."  As  regards 
places  located  on  waterways,  he  says :  ' '  Nature  has,  so  to  speak, 
discriminated  in  their  favor,  and  given  them  what  we  may  call  natural 
transportation.  But  she  has  discriminated  against  inland  places,  and 
left  them  dependent  entirely  upon  artificial  transportation,  by  horse 
or  man  power,  slow  and  expensive.  In  fact,  the  railroad  is  built,  in 
general,  only  for  the  service  of  the  inland  party,  and  it  sells,  as  it 
were,  its  surplus  power  to  the  maritime  party  for  any  price  it  will 
bring.  An  example  will  illustrate.  New  York  and  San  Francisco 
have  always  enjoyed  water  transportation,  for  freights  from  one  to  the 
other,  slow,  but  very  cheap.  No  one  would  ever  dream  of  building  a 
railroad  between  those  cities  for  the  sake  of  through  business  it  could 
get  in  competition  with  the  ocean.  But  between  them  lie  wide 
stretches  of  lands  against  which  nature  has  discriminated  in  the 
matter  of  transportation,  while  endowing  them  with  great  and  varied 


CONTROVERSIES.  45 

DISCRIMINATIONS  BETWEEN    ARTICLES CHARGING   WHAT 

THE  TRAFFIC    WILL  BEAR. 

There  is  a  third  class  of  discriminations — discrimi- 
nations between  articles.  A  railroad  charges  more 
for  hauling  a  car-load  of  freight  worth  $1,000  than 
for  hauling  a  car-load  of  freight  worth  $100,  although 
both  cars  are  loaded  at  the  same  time  and  place, 
weigh  the  same,  are  carried  by  the  same  train  to  the 
same  place,  and  are  delivered  to  the  same  person. 
The  difference  in  the  charge  is  not  due  to  the  differ- 
ence in  risk  of  loss  by  collision  or  otherwise.  It  is 
due  to  the  fact  that  the  $1,000  freight  can  afford 
to  pay  a  greater  charge  than  the  $100  freight. 
The  $100  car-load  is  charged  all  that  it  can  stand, 
and  the  $1,000  car-load  is  charged  all  that  it  can 
stand.       This    frequently    happens    in    the     mining 

wealth  in  agricultural,  mineral,  and  other  resources.  Her  discrimina- 
tion was  so  heavy  that  only  narrow  margins  of  this  vast  territor)-  could 
be  utilized  and  developed  with  ordinary  land  transportation.  To 
overcome  this  natural  discrimination,  railroads  were  built  into  the 
interior  in  every  direction,  and  with  their  gradual  improvement  in 
machinery  and  in  methods  of  work,  they  have  pushed  into  the  re- 
motest sections,  and,  making  connections  in  each  direction,  at  last  we 
have  through  lines  from  New  York  to  San  Francisco. 

"  As  the  railroads  advanced,  they  enormously  reduced  the  discrimi- 
nations of  nature  throughout  this  inland  territory.  Thirty  years  ago 
it  cost  over  a  dollar  a  pound  to  carry  from  New  York  machinery  and 
tools  to  work  the  mines  of  Utah,  and  the  trip  consumed  the  whole 
summer,  during  which  the  purchaser  lost  the  use  of  most  of  his  money. 
Now  the  trip  requires  but  two  weeks,  or  less,  and  the  rate  is  about 
two  cents.  Comparing  these  rates,  and  considering  the  character  of 
the  present  service  as  compared  with  the  old,  it  is  not  an  exaggeration 
to  say  that  the  railroads  have  removed  about  ninety-nine  one-hun- 
dredths  of  the  discrimination  against  Utah  which  nature  ordained  in 
surrounding  her  with  deserts  and  mountains." 


46  THE   CORPORATION   PROBLEM. 

regions  where  the  railroad  rate  varies  with  each  car- 
load, according  to  the  assay  value  of  the  ore  on 
that  car-load.  A  car-load  of  ore  worth  $1,000  is 
charged  correspondingly  more  than  a  car-load  of  ore 
worth  $100. 

What  arguments  do  the  railroads  advance  in  de- 
fence of  this  practice  ?  Their  argument  is  similar  to 
that  on  discriminations  between  towns.  They  say 
that  only  the  high  grade  of  ore  can  afford  to  pay 
rates  that  yield  interest  and  dividends  to  the  rail- 
road ;  that  the  low-grade  ore  must  be  carried  at  a 
very  low  rate  of  profit  to  the  railroad,  or  else  it  will 
not  be  shipped  at  all  ;  that  it  is  better  to  carry  the 
low-grade  ore  at  a  small  profit  than  not  to  carry  it 
at  all  ;  but  that  the  high-grade  ore  must  pay  regular 
charges  and  high  charges  if  the  railroad  is  to  be 
built  and  operated  and  payment  be  made  of  interest 
and  dividends.  The  railroads  argue  that  they  are 
justified  in  reducing  the  regular  rate  down  to  the 
point  where  the  shipper  can  afford  to  ship,  and  that 
such  reduction  is  right  provided  there  is  some  profit 
in  the  business,  however  small  that  profit  may  be. 
In  other  words,  the  charge  should  be  whatever  the 
traffic  will  bear — high  if  the  shipment  is  valuable  ; 
low  if  it  is  of  little  value.' 


'  Charging  what  the  traffic  will  bear  "  adjusts  the  burdens  where 
they  can  be  borne,  and  develops  a  vast  amount  of  business  which 
could  not  otherwise  exist." — Hadley  on  "  Railroad  Transportation," 
p.  76.  Compare,  however,  an  article  in  the  Railroad  Gazette,  March 
29,  1889,  to  the  effect  that  charging  what  the  traffic  will  bear  is  per- 
haps wrong  ;  that  charging  on  the  cost  of  service  is  not  advisable  ; 
and  that  charging  according  to  the  necessities  of  the  case  is  the  true 
rule. 


CONTROVERSIES.  47 

Here,  too,  there  is  force  in  the  argument,  but  dif- 
ficulty in  the  practice.  If  the  railroads  are  permitted 
to  make  a  discrimination  based  upon  the  value  of  the 
article,  they  at  once  charge  all  that  the  traffic  will 
bear.  By  this  rule  the  valuable  article  is  rendered 
not  much  more  valuable  to  the  owner  than  the  cheap 
article  is  to  its  owner.  The  railroad  takes  all  except 
the  small  margin  which  will  induce  the  owner  to 
transport  the  article  instead  of  throwing  it  away. 
Give  the  railroad  this  right,  and  it  does  not  hesitate 
to  practically  confiscate  the  chief  value  of  the  prop- 
erty transported.  And  if  it  has  a  complete  monop- 
oly in  a  district,  it  leaves  little  for  the  inhabitants  of 
that  district.  Even  in  England  the  difficulty  of  the 
problem  is  recognized,  but  no  solution  has  been 
found. 

"  The  avowed  principle  of  railway-traffic  managers — to  impose  on 
the  traffic  such  rates  as  it  can  bear — is  a  principle  of  discrimination. 
There  is  no  pretence  of  charging  rates  according  to  the  cost  of  the 
service.  The  railways  have  got  rid  of  this  good  old  standard  of 
charges,  and  have  adopted  instead  the  basis  of  charging  all  they  can 
get.  That  principle  does  not  look  well  on  the  face  of  it,  but  it  may 
be  the  only  one  that  is  practically  workable.  Upon  the  point  we 
ofifer  no  opinion." 

Such  is  the  conclusion  of  Jeans,  the  great  English 
authority.' 

In  America  the  railroads  were  allowed  to  charge 
what  the  traffic  would  bear  until  the  rapacity  of  the 
railroads  became  intolerable.  Statutes  were  then 
passed  by  the  legislatures  of  the  various  States, 
attempting  to  regulate  the  evil.     These  statutes  did 

'  Jeans  on  '*  Railway  Problems,"  p.  524. 


48        THE  CORPORATION  PROBLEM. 

not  and  could  not  accomplish  their  purpose.  It  has 
been  found  that  great  judgment,  experience,  and 
capacity  are  required  in  classifying  the  different 
kinds  of  freight  so  that  each  class  shall  bear  its 
due  proportion  of  railroad  charges.  '  In  fact,  the 
classification  of  freight  is  one  of  the  most  formida- 
ble difficulties  that  face  the  Interstate  Commerce 
Commission  to-day.  The  final  analysis  of  the  prob- 
lem seems  to  require  a  separate  consideration  of  each 
article  of  commerce,  and  on  each  article  the  question 
is  whether  the  rate  charged  for  transporting  it  is  too 
high.' 

FREE    PASSES. 

A  free  railroad  pass  to  a  public  official  is  a  bribe, 
open,   shameless,  and   flagrant.      Its  purpose    is   to 

^  The  Interstate  Commerce  Commission  says  in  its  decisions,  vol. 
iv.,  p.  75  :  "  We  think  no  better  rule  applicable  to  the  matter  under 
investigation  than  that  applied  by  railroads  themselves,  in  accordance 
with  which  rates  are  so  adjusted  as  to  secure  the  largest  interchange 
of  commodities.  This  rule  is  approved  by  its  frequent  application  in 
the  movement  of  Western  grain  through  the  voluntary  action  of  the 
roads.  Put  such  a  rate  on  corn  as  will  encourage  and  warrant  its 
movement  if  such  a  rate  is  fairly  remunerative.  While  rates  should 
not  be  so  low  as  to  impose  a  burden  on  other  traffic,  they  should  have 
reasonable  relation  to  cost  of  production  and  the  value  of  the  trans- 
portation service  to  the  producer  and  shipper." 

The  Interstate  Commerce  Commission  has  considered  and  dis- 
cussed this  subject  very  carefully  in  its  annual  reports,  and  has  recog- 
nized the  fact  that  the  solution  of  the  question  of  classification  of 
freight  in  respect  to  the  rates  charged  for  its  transportation  requires 
time,  care,  experience,  and  labor.  It  is  a  question  which  the  Com- 
mission is  earnestly  endeavoring  to  settle.  See  the  fourth  annual 
report  of  the  Commission,  p.  14,  etc.  ;  also  pp.  31-36.  And  for  a 
vigorous  criticism  thereon,  see  Railroad  Gazette,  Dec.  19,  1890, 
p.  878. 


CONTROVERSIES.  49 

prevent  legislatures,  city  officers,  and  public  men 
generally  from  insisting  upon  and  enforcing  the 
rights  of  the  people.  Yet  the  coolness  with  which 
these  passes  are  given  to  legislators  and  judges  and 
the  complacency  and  openness  with  which  they  are 
received  are  remarkable.  There  are  few  or  no  de- 
fendants of  the  iniquity,  and  no  railroad  attempts  to 
justify  it,  yet  there  are  few  railroads  which  have 
abolished  it.     It  is  a  cheap  mode  of  bribery. 

There  have  been  various  statutes  relative  to  it. 
The  Interstate  Commerce  Act  forbids  free  passes, 
but  this  act  applies  only  to  interstate  railroads. 
The  legislature  of  Delaware  regularly  passes  a  resolu- 
tion of  thanks  to  the  railroads  "  for  passes  to  the 
members."  In  New  York,  where  the  free  passes  to 
the  legislature  are  distributed  openly  and  notoriously, 
the  Railroad  Commissioners  for  years  have  endeav- 
ored in  vain  to  have  certain  laws  enacted  to  remedy 
well-known  flagrant  railroad  abuses  in  that  State. 
Nevertheless  the  railroads  are  not  always  to  be 
blamed.  In  Michigan,  a  few  years  ago  the  railroads 
decided  to  withdraw  the  free  passes  from  the 
legislature.  Immediately  a  bill  was  introduced  by  a 
member  to  reduce  railroad  rates.  The  railroads  there- 
upon restored  the  passes,  and  the  bill  was  dropped. 
In  the  State  of  Nebraska  a  well-known  anti-monopo- 
list, when  questioned  on  the  stump  as  to  why  he 
rode  on  a  free  pass,  promptly  replied,  ''  Certainly  I 
do  ;  forage  on  the  enemy ;  forage  on  the  enemy." 

Pennsylvania  in  its  famous  Constitution  of  1 873, 

prohibited  free  passes,  and  other  States  have  followed 

her  example.    New  Jersey  has  tried  another  remedy, 
4 


50        THE  CORPORATION  PROBLEM. 

and  with  characteristic  directness  has  enacted  a  law 
that  all  railroads  must  give  free  passes  to  the  legis- 
lature and  certain  public  officers,  thereby  changing  the 
gift  from  a  favor  to  a  right.  Connecticut  has  recently, 
with  true  Yankee  ingenuity,  inaugurated  a  different 
plan,  and  a  specified  state  officer  is  required,  upon 
application  therefor  by  a  member  of  the  legislature, 
to  purchase  transportation  for  him,  and  to  pay  for  it 
out  of  the  State  funds. 

The  free-pass  bribery  of  public  officials  is  becoming 
too  flagrant  and  too  indefensible  to  endure  or  to  be 
endured.  It  will  be  abolished,  however,  not  by  any 
virtue  of  the  railroads,  or  of  the  officials  themselves, 
but  by  the  force  of  public  sentiment. 

Another  abuse  of  the  free-pass  system  was  that 
under  the  old  plan  the  rich  and  powerful  rode  free 
while  the  poor  man  paid.  Those  palmy  days,  how- 
ever, of  free  passes  to  large  shippers  and  to  every 
person  who  had  influence  with  the  railroad  have 
nearly  gone  by.  The  railroads  have  found  that  such 
liberality  does  not  pay.  The  provision  of  the  Inter- 
state Commerce  Act  which  prohibits  the  free  pass, 
counts  but  little  with  the  average  railroad  official. 
But  the  fact  that  there  is  no  profit  in  it  to  the  rail- 
roads themselves  will  abolish  the  free  pass  so  far  as 
business  men  are  concerned.' 

^  The  following  statement  appeared  in  the  Railroad  Gazette  late  in 
the  year  iSgo : 

"  The  Chicago  roads  have  made  an  agreement  for  passes  for  1891, 
the  principal  features  of  which  are  :  No  annual  or  time  passes  to 
employes  of  roads  except  upon  request  of  officials  ;  half-fare  permits 
to  be  good  in  only  one  State  ;  no  time  passes  to  agents  of  roads  en- 
gaged in  the  sale  of  coal  or  other  commodities  ;  no  passes,   mileage 


CONTROVERSIES.  5 1 

POOLS. 

Many  years  ago  it  became  clear  to  railroad  men 
that  at  every  town  where  two  or  more  railroads  com- 
})eted  with  each  other  for  the  transportation  business 
of  that  town,  there  would  be  secret  as  well  as  open 
reductions  of  rates,  railroad  "  wars,"  general  demoral- 
ization of  the  business,  and  finally  no  profit  at  all  to 
any  of  the  railroads.  It  became  clear  also  that  the 
agreements  of  the  railroads  to  maintain  a  certain 
rate  were  utterly  worthless  ;  that  the  agreement  was 
no  sooner  made  than  it  was  broken  ;  and  that  a  rail- 
road contract  to  maintain  rates  was  the  same  as  no 
contract  at  all.  It  became  clear  further  that  if  the 
railroads  touching  at  any  town  should  agree  among 
themselves  on  a  division  of  the  traffic  to  and  from 
the  town,  and  should  agree  also  as  to  the  rates  to  be 
charged,  then  that  the  agreed  rate  might  be  main- 
tained ;  otherwise  not.  Accordingly  such  agree- 
ments were  made,  and  they  were  called  "  pools." 

A  railroad  pool  is  an  agreement  between  part 
or  all  of  the  railroads  running  into  a  place,  to  charge 
certain  railroad  rates,  and  to  divide  the  business 
in  specified  proportions.  The  pool  is  organized  to 
prevent  competition  between  the  railroads.    In  most 

tickets,  or  other  forms  of  transportation  to  be  issued  to  influence  either 
freight  or  passenger  business.  The  regulations  concerning  trip  passes 
are  somewhat  less  rigid  than  the  above.  The  World's  Fair  commis- 
sioners, Grand  Army  officers,  and  employes  of  refrigerator  car 
companies  are  specially  cut  off  in  both  sections  of  the  agreement." 

Concerning  the  abuses  growing  out  of  the  free-pass  system,  see  also 
the  first  annual  report  of  the  Interstate  Commerce  Commission,  pp. 
7,  S.  The  subject  of  free  passes  is  considered  also  in  the  third 
annual  report  of  the  Interstate  Commerce  Commission,  pp.  9-13. 


52  THE   CORPORATION   PROBLEM. 

of  the  towns  along  a  railroad  line,  the  railroad  has  a 
complete  and  permanent  monopoly  because  great 
capital  and  great  loss  are  involved  in  paralleling 
that  line.  The  pool  creates  a  monopoly  in  towns 
where  two  or  more  railroads  run.  It  is  a  combina- 
tion of  the  railroads  running  into  a  town.^ 

These  pools  sprang  rapidly  into  existence.  Where- 
ever  two  or  more  roads  competed,  there  the  pool 
was  formed.  The  system  soon  became  a  vast  net- 
work overspreading  the  country.  Every  railroad 
was  a  member.  The  whole  country  was  divided 
into  sections  for  convenience  in  organizing  and  carry- 
ing on  the  pool.  Every  town  covered  by  the  pool 
was  called  a  ''  pooled  town."  Even  New  York,  Chi- 
cago, and  the  great  cities  generally  were  pooled. 
The  pool  gave  as  complete  a  monopoly  as  though 
but  a  single  railroad  ran  to  a  town,  except  at 
points  where  water  transportation  came  into  com- 
petition. 

Naturally  the  railroads  argue  in  favor  of  the 
pool.  They  claim  that  the  pool  prevents  ruinous 
railroad  Avars ;  makes  staple  and  reliable  rates ;  en- 
ables shippers  to  calculate  with  certainty  on  rail- 
road charges  ;  does  away  with  secret  cutting, 
discriminations,  and  underbilling ;  places  towns  with 
one  railroad  on  an  equality  with  towns  having  many 
railroads  ;  prevents  the  railroad  bankruptcies,  which 
are  disastrous    to    the    investor   and  business   com- 

'  Hadley  on  "Railroad  Transportation,"  p.  76,  says  that  a  pool 
exists  where  competitors  agree  (i)  to  divide  the  field,  (2)  to  divide 
the  traffic,  or  (3)  to  divide  the  earnings  ;  and  that  a  railroad  pool  is 
generally  a  mixture  of  the  last  two. 


CONTROVERSIES.  53 

munity  ;  and  enables  the  railroad  to  charge  a  fair 
rate,  and  thereby  pay  interest  and  reasonable 
dividends. 

Jeans,  the  English  authority,  after  remarking  that 
the  American  pool  has  no  exact  counterpart  in  other 
countries,  summarizes  the  advantages  of  the  pool,  as 
follows  : 

"It  seems  to  be  generally  admitted  that,  in  the  United  States, 
pools  have  not  been  without  beneficial  influence  ;  they  have  pre- 
vented unjust  discriminations,  through  special  secret  rates,  to  favored 
freighters  ;  they  have  prevented,  similarly,  unjust  discriminations 
against  towns  and  cities,  and  against  particular  States  or  sections  of 
the  country  ;  they  have  tended  to  put  an  end  to  constantly  fluctuating 
rates  ;  they  have  prevented  the  absorption  of  the  weaker  lines  by  the 
stronger,  and  have  thus  conserved  the  elements  of  competition  ;  they 
have  tended  to  prevent  the  bankruptcy  of  the  great  railroad  corpora- 
tions, and  the  consequent  shocks  to  the  financial  interests  of  the 
country.  Moreover,  they  have  not  hindered,  but  rather  assisted  to 
promote,  the  extension  of  transportation  facilities,  the  reduction  of 
rates,  and  the  development  of  traffic."  * 

'  Jeans  on  "  Railway  Problems,"  p,  517. 

Alexander  on  "  Railway  Practice,"  pp.  23-24,  says  that  the  pool 
is  justifiable  as  "  removing  the  tempation  to  give  rebates,"  and  that 
"  not  only  are  the  rates  lower,  more  uniform  to  all  shippers  than  ever 
before,  and  less  liable  to  fluctuations,  but  uniformity  of  classification 
is  increasing,  and  harmonious  arrangements  between  different  lines 
are  promoted,  which  greatly  facilitate  business." — p.  30. 

The  Railroad  Gazette,  December  28,  1 888,  says  : 

"We  are  told  that  'the  pool  was  never  an  adequate  preventive 
against  rate  wars.'  Very  true.  The  pool  was  never  allowed  sufficient 
legal  recognition  to  give  it  adequate  power  for  the  purpose.  In  those 
countries  where  it  has  been  given  adequate  powers,  it  has  proved  an 
adequate  preventive.  Where  it  has  been  tolerated,  it  has  proved  a 
partial  preventive.  Now  that  it  is  totally  forbidden,  we  have  no 
preventive  at  all,  short  of  actual  consolidation.  .  .  .  The  pro- 
hibition of  pools  was  intended  by  the  majority  of  those  who  favored 
it  to  make  the  maintenance  of  rate  agreements  more  difficult ;  in  other 


54        THE  CORPORATION  PROBLEM. 

All  this  may  be  true  temporarily,  but  it  is  not  the 
permanent  result.  A  pool  is  but  a  truce.  It  is 
only  a  cessation  of  hostilities.  It  generally  ends  a 
railroad  war,  and  ends  with  a  railroad  war.  Not 
even  while  it  is  in  existence  does  it  prevent  secret 
cutting,  discriminations,  and  all  the  practices  by 
which  one  railroad  seeks  to  get  business  away  from 
another  railroad. 

The  old  and  great  trunk  lines  have  begun  to  see 
that  the  pool  is  a  good  thing  for  their  weak  rivals, 
but  a  bad  thing  for  themselves.  A  railroad  war 
means  ruin  to  a  new  railroad,  because  the  war 
reduces  rates  below  the  cost  of  running  the  trains. 
But  the  pool  prevents  war  ;  sustains  the  new  road  ; 
enables  it  to  establish  its  finances ;  gives  it  time 
to  gather  local  business  ;  creates  confidence  in  its 
future  ;  and  enables  it  to  sell  its  bonds  to  investors. 
The  pool  gives  the  weakling  an  opportunity  to 
grow  strong.  The  great  trunk  lines  are  beginning 
to  see  the  folly  of  the  pool,  so  far  as  their  interests 
are  concerned.  It  is  true  that  this  development 
of  weak  trunk  lines  by  the  pool  is  an  advantage 
to  the  public,  but  it  may  safely  be  said  that  this 
incidental  advantage  to  the  people  is  not  the  object 
of  the  pool.  The  railroads  are  not  run  for  philan- 
thropic purposes. 

words,  to  increase  the  liability  to  their  violation.  That  it  has  had 
that  effect  we  see  not  the  slightest  reason  to  doubt."  It  is  also  said 
that  if  a  person  "will  take  the  trouble  to  look  into  the  history  of 
European  railroads,  where  pooling  experiments  have  been  carried 
much  farther  than  here,  he  will  find  that  permanent  agreements  have 
tended  to  check  new  construction,  while  their  absence  has  been 
accompanied  by  a  marked,  and  often  disastrous,  increase  of  such 
construction." 


CONTROVERSIES.  55 

The  Interstate  Commerce  Commission  has  said  of 
pools : 

"  The  pooling  system  was  looked  upon  with  distrust  by  the  pub- 
lic, mainly  because  it  seemed  to  be  a  scheme  whereby  competition 
between  the  roads  \:ould  be  obviated,  and  rates  for  railroad  service  put 
or  kept  up  to  unreasonable  figures.  But  if  railroad  managers  sup- 
j)osed  that  by  this  scheme  they  were  to  stop  competition  among 
themselves,  the  result  has  not  answered  their  expectations.  The 
competition  has  still  gone  on  ;  each  road  striving  to  obtain  as  large  a 
share  of  the  business  as  possible,  and  no  agreement  among  them 
could  altogether  prevent  a  yielding  to  the  pressure  of  shippers  for 
lower  rates."  ' 

The  public  have  always  been  hostile  to  the  pool. 
It  fixed  rates  arbitrarily  without  consulting  shippers 
or  shippers'  interests.  It  was  subject  to  sudden 
fluctuations  without  notice.  It  created  a  monopoly 
without  responsibility.  The  regulating  power  of 
competition  was  done  away  with  and  nothing  in  be- 
half of  the  public  was  put  in  its  place.  Moreover  it 
divided  and  diverted  traffic.  A  large  shipment  sent 
to  one  railroad  was  liable  to  be  delivered  at  its  des- 
tination by  a  different  or  several  railroads  with  all 
the  delays  and  troubles  incident  to  each. 

Public  hostility  to  pools  culminated  in  1887  in 
the  Interstate  Commerce  Act.  By  one  of  its  pro- 
visions, pools  are  prohibited.  As  to  the  effect  of 
that  prohibition  there  is  a  wide  difference  of  opinion. 
There  is  no  doubt  that  the  breaking  up  of  the 
pool  has  promoted  competition  among  railroads, 
but  it  has  also  increased  discriminations,  secret  rate- 
cutting,  and  other  nefarious  modes  of  getting  busi- 
ness. Consequently  a  strong  effort  is  now  being 
made  by  the  railroads  to  repeal  the  anti-pool  pro- 

*  First  annual  report,  p.  34. 


56        THE  CORPORATION  PROBLEM. 

vision  on  the  ground  that  the  pool  may  be  bad, 
but  it  prevents  things  that  are  worse.  There  is 
little  indication,  however,  that  the  American  peo- 
ple are  inclined  to  allow  such  a  repeal.  The  people 
at  large  do  not  favor  the  railroad  plan  of  curing  one 
evil  by  another.  For  the  things  '^  that  are  worse," 
other  remedies  will  be  found  and  those  remedies 
will  be  efficacious.  The  pool  is  believed  to  be  iniqui- 
tous, demoralizing,  and  dangerous.  It  will  not  be 
revived.  In  its  place,  however,  will  arise  a  more 
substantial  union  of  railroad  interests,  the  character 
of  which  is  considered  elsewhere.* 

RAILROAD     WARS. 

A  railroad  war  is  a  war  of  rates.  It  is  competi- 
tion broken  loose.  It  is  a  contest  between  two  or 
more  competing  roads  to  see  which  one  can  endure 
longest  the  carrying  on  of  business  at  a  loss.  The 
war  is  caused  by  secret  cutting  of  rates,  or  by  loss 
of  business,  or  by  the  advent  of  a  new  road  seeking 
business,  or  by  a  stock-gambling  project  or  by  the 
determination  of  an  old  road  to  crush  a  new  com- 
peting road  before  the  latter  becomes  established. 

These  wars  sometimes  do  a  little  good.  Fre- 
quently it  happens  that  after  one  of  them  the  rates 
are  never  increased  to  former  figures.     Such  has  been 

'  See  Chapter  III.  Since  the  enactment  of  the  Interstate  Com- 
merce Act  prohibiting  pools,  there  have  arisen  certain  agreements 
between  the  railroads  for  the  purpose  of  regulating  rates.  These 
agreements  also  are  explained  and  considered  in  Chapter  III, 

For  the  railroad  argument  that  pooling  should  be  legalized,  see 
the  letter  of  George  R.  Blanchard,  Chairman  of  the  Central  Traffic 
Association,  8  Ry.  &  Corp.  L.  J.,  518  (Dec,  1890). 


CONTROVERSIES.  57 

the  case  with  wars  on  rates  between  New  York 
and  Chicago,  and  also  on  rates  from  the  Pacific 
coast  to  tlie  East.  The  war  itself  is  not  the  cause 
of  the  permanent  reduction  however.  The  cause 
lies  further  back,  and  is  due  to  the  increase  in  the 
number  of  railroads,  the  increase  of  business,  the 
better  facilities  for  handling  traffic,  or  the  better  and 
cheaper  traffic  arrangements  with  connecting  lines. 

But  in  general  a  railroad  war  does  much  harm. 
It  brings  some  of  the  roads  to  the  very  verge  of 
bankruptcy  ;  it  jeopardizes  the  payment  of  interest 
on  railroad  bonds ;  it  stops  dividends ;  it  causes 
panics  in  the  commercial  centres ;  and  it  unsettles 
business,  finances,  and  general  prosperity.  True  it 
is  that  while  the  war  lasts,  the  persons  using  the 
railroads  save  considerable  money  in  railroad  rates. 
But  this  saving  is  offset  partly  by  the  fact  that  un- 
necessary travel  is  indulged  in,  and  partly  by  the 
fact  that  the  persons  thus  benefited  form  but  a 
small  proportion  of  the  whole  people.  A  general 
railroad  war  brings  confusion  and  financial  distress 
to  railroads  and  business  interests.  Sooner  or  later 
the  whole  country  is  disturbed.' 

But  how  are  they  to  be  prevented  ?  It  is  clear 
that  the  railroads  themselves  cannot  refrain  from 
going  to  war.  They  have  a  quarrelsome  and  bel- 
ligerent nature.  When  not  engaged  in  fighting  the 
people,  they  are  prone  to  fight  among  themselves. 
There  is  no  hope  of  relief  from  that  quarter. 

'  A  very  full  and  detailed  statement  of  the  evils  arising  from  rail- 
road wars  and  unreasonably  low  rates  is  given  in  the  second  an- 
nual rei)ort  of  the  Interstate  Commerce  Commission,  pp.  19-24  ; 
and  the  fourth  annual  report,  p.  21,  etc. 


58         THE  CORPORATION  PROBLEM. 

' '  War  is  the  natural  state  of  an  American  railway  towards  all 
other  authorities  and  its  own  fellows,  just  as  war  was  the  natural 
state  of  cities  towards  one  another  in  the  ancient  world.  "  ^ 

The  railroads  claim  that  pools  are  the  surest  pre- 
ventives of  wars.  But  the  pool  is  worse  than  the 
war.  Moreover,  railroad  wars  broke  out  in  spite  of 
the  pools  and  would  do  so  again  if  pools  were  re- 
established. The  pool  began  when  a  war  ended,  and 
ended  when  a  war  began. 

A  railroad  clearing-house  has  been  proposed  to 
prevent  railroad  wars.  Such  a  clearing-house  is  an 
old  institution  in  England,  but  is  yet  to  be  seen 
in  America.  Moreover,  when  once  established  in 
America,  as  it  soon  will  be,  it  will  be  found  to  be 
nothing  more  nor  less  than  a  book-keeping  concern. 
It  cannot  prevent  railroad  wars. 

"  It  is  the  fashion  to  speak  of  the  English  clearing-house  as  though 
it  had  stopped  rate  wars.  It  undoubtedly  had  an  indirect  effect  of 
this  kind,  but  its  indirect  influence  was  small.  In  fact,  the  officials 
of  the  clearing-house  have  taken  special  pains  to  arrange  this  settle- 
ment in  such  a  manner  as  not  to  be  required  to  touch  disputes 
between  individual  companies  with  regard  to  traffic  questions."  ' 

*  Bryce's  "  American  Commonwealth,"  vol.  ii.,  p.  514. 

^Railroad  Gazette,  Feb.  I,  i88g,  and  the  same  journal,  January  1 1, 
1889,  says : 

"  Apart  from  the  question  of  rates,  the  existence  of  such  a  clearing- 
house is  of  great  value  to  almost  all  parties  concerned.  To  the  rail- 
roads it  saves  the  necessity  of  partial  payments  on  shipments  of 
through  freight,  and  enables  the  different  companies  to  settle  with 
one  another  by  book  credits  and  balances,  instead  of  by  actual  cash 
payments.  In  short,  it  does  for  the  whole  system  of  freight  accounts 
what  a  fast-freight  line  does  for  the  settlement  of  car-mileage 
balances.  We  are  so  used  to  the  existing  system  that  many  of  us 
fail  to  appreciate  the  unnecessary  work  involved  in  the  collection  of 
back  charges  ;  but  it  is  an  antiquated  and  cumbrous  method  of  doing 


CONTROVERSIES.  59 

The  railroads  are  beginning  to  claim  that  the  In- 
terstate Commerce  Act  should  prohibit  railroad 
wars,  inasmuch  as  it  prohibits  railroad  pools, — the 
preventives  of  wars.  If  the  present  tendencies 
continue,  this  apparently  extreme  view  may  come 
true,  inasmuch  as  the  time  seems  not  far  distant 
when  the  Interstate  Commerce  Commission  will  be 
given  power  to  reduce  railroad  rates.  There  is  much 
force  in  the  argument  that  if  the  power  to  reduce 
rates  is  given  to  that  Commission,  the  power  should 
also  be  given  to  prevent  a  sudden  and  extreme  re- 
duction of  rates, — in  other  words,  to  prevent  a  war 
in  rates. 

Relief,  however,  is  coming  from  another  quarter, 
and  by  no  means  with  a  leaden  heel.  It  is  coming 
as  it  came  in  England  and  France.  It  will  be  by 
the  unification  and  consolidation  of  competing  rail- 
roads, and  this  will  put  an  end  to  railroad  w^ars 
peremptorily  and  beyond  question.  This  subject  is 
considered  elsewhere.* 

business,  and  it  is  astonishing  that  it  should  have  been  allowed  to 
continue  so  long. 

"  To  railroads  and  shippers  alike  a  clearing-house  furnishes  a 
welcome  means  of  locating  loss  or  damage,  and  even  of  tracing  lost 
articles.  In  these  respects  the  existing  freight  lines  are  far  from 
satisfactory.  It  sometimes  seems  as  if  nobody  were  responsible  for 
anything.  In  these  respects  the  old-fashioned  freight  line,  like  the 
Merchants'  Dispatch,  was  better  than  all  the  modern  co-operative 
ones. 

"  But  all  this  does  not  prove  that  the  clearing-house  can  maintain 
rates.  As  far  as  the  facts  go,  they  prove  the  contrary.  The  man- 
agers of  the  English  clearing-house  have  habitually  taken  the  utmost 
care  not  to  interfere  in  rate  agreements.  It  not  only  makes  no  rates, 
it  does  not  even  take  the  initiative  in  dividing  them." 

*  See  Chapter  III. 


6o  THE   CORPORATION   PROBLEM. 

USELESS    PARALLELING  OF    RAILROADS. 

Under  the  general  laws  prevailing  in  most  of  the 
States  for  the  incorporation  of  railroads,  only  a  cer- 
tificate need  be  filed  in  order  to  obtain  a  charter. 
No  legislature  need  be  bribed  or  convinced  ;  no 
State  officers  need  be  consulted  ;  no  large  expense 
need  be  incurred  for  "  influence  "  ;  and  no  hostile 
railroad  can  prevent  the  incorporation. 

This  ease  of  incorporation,  together  with  the 
periodical  eras  of  abundance  of  money  in  the  market, 
of  reckless  speculation  and  inflation,  and  of  "  boom- 
ing "  times  generally,  has  had  a  curious  effect.  It 
has  enabled  adventurers,  promoters,  and  irrespon- 
sible speculators  to  build  railroads  parallel  to  old 
railroads  for  the  sole  purpose  of  compelling  the  lat- 
ter roads  to  buy  them  out.  This  is  blackmail  on  a 
gigantic  scale.  Not  only  this  but  the  new  railroad 
is  often  built  to  invade  the  territory  of  an  old  and 
valuable  railroad,  under  pretence  of  building  a  com- 
peting line,  but  for  the  sole  purpose  of  "  floating  off  " 
on  to  the  public  great  quantities  of  stocks  and 
bonds. 

If  such  railroad  building  resulted  in  an  independent 
competing  line  the  public  would  have  no  cause  to 
complain.  But  such  is  not  the  case.  Usually  the 
new  road  is  built  to  be  sold  to  the  old  one,  and  even 
when  it  is  not,  the  old  road  sooner  or  later  absorbs 
the  new  one.  This  absorption  generally  takes  place 
after  a  disastrous  railroad  war,  that  throws  the 
new  road  into  a  receiver's  hands.  If  not  in  this  way, 
then  it  takes  place  by  consolidation. 

The  most  notable  instance  of  this  was  the  West 


CONTROVERSIES.  6l 

Shore  and  the  Nickel  Plate  Railroads,  one  of  which 
fell  into  the  hands  of  its  competitor  after  a  railroad 
war,  and  the  other  by  purchase  and  practical  con- 
solidation. By  the  laws  of  trade  based  on  natural 
laws,  which  are  stronger  than  the  laws  of  men,  two 
or  more  competing  railroads  sooner  or  later  cease  to 
compete,  and  they  become  a  monopoly  by  agreement 
or  by  consolidation.' 

And  when  the  consolidation  or  agreement  takes 
place  the  effect  is  ruinous.  There  are  two  railroads 
where  there  should  be  but  one  ;  two  roads  to  be 
sustained  ;  two  roads  to  consume  money  for  interest 
and  dividends,  and  two  roads  for  whose  maintenance 
the  rates  must  be  kept  up,  instead  of  being  reduced, 
as  they  could  be  if  there  were  but  one. 

It  is  with  reason  that  the  Kansas  Railroad  Com- 
missioners say  of  the  railroads  in  that  State  : 

"After  the  'boom 'the  'boomerang.'  The  companies  found 
themselves  confronted  with  fixed  charges  on  non-paying  trackage  ; 
the  municipalities  equally  unhappy  under  a  debt  of  aid  bonds  and 
extravagance  in  public  expenditure.  The  one  could  not  find  relief 
through  resort  to  excessive  charges,  nor  the  other  through  a  repudia- 
tion of  contract  obligations  ;  the  majesty  of  the  law  would  not  permit 
it.  Time,  the  one  great  healer  of  all  curable  wounds  and  ills,  can 
alone  set  things  right.  Indeed,  it  has  already  done  much  to  correct 
the  errors  and  ills  of  this  overdoing  in  Kansas  enterprise.  A  phe- 
nomenal growth  in  population,  agriculture  and  other  productions,  and 
rapidly  accumulating  wealth,  together  with  the  more  prudent  methods 
bom  of  adversity,  have  done  much  already  to  relieve  the  strain,  and 
will,  we  are  confident,  bring  complete  relief  at  no  distant  day. 

"  This  recital  of  facts,  connecting  the  evils  of  the  present  with 
their  cause  in  the  past,  is  not  for  amusement,  but  to  invoke  a  more 
careful  and  intelligent  action  than  comes  of  passionate  appeal  and 
vindictive  assault.     We  have  1,500  miles  of  railroad  which  is  worse 


>  Q 


See  Chapter  III. 


62  THE   CORPORATION   PROBLEM. 

than  worthless  to  its  owners,  and  a  burden  upon  the  commerce  of  the 
State  as  a  whole,  although  a  blessing  to  the  country  along  its  line.  It 
came  by  invitation,  encouragement,  and  support  of  the  people,  and 
cannot  be  ignored  in  the  discussion  of  rate-making  for  the  rest." 

In  England  such  a  thing  is  impossible  because  in 
that  country  no  railroad  can  be  built  until  it  has 
passed  through  the  crucible  of  a  parliamentary  com- 
mittee and  has  obtained  a  special  charter  from  Parlia- 
ment. But  this  restriction  is  worse  than  no  restriction 
at  all.  Such  an  ordeal  is  ruinous  to  the  new  railroads, 
even  to  those  which  should  be  built.  The  parliamen- 
tary expense  r.lone  in  England  in  getting  a  charter 
would  be  enough  to  build  an  American  railroad. 
Nearly  a  half  million  of  dollars  have  been  paid  for 
the  parliamentary  expenses  of  a  single  railway  in 
England — the  Great  Western.  Hence  it  is  that  the 
old  railroads  in  England  have  a  monopoly  that  can- 
not easily  be  disturbed  or  broken.  America  will 
never  go  back  to  the  old  plan  of  granting  special 
charters  to  railroads. 

The  established  railroads  of  America  are  in  favor 
of  the  consent  of  railroad  commissioners  before  a 
railroad  can  be  built.  Already  in  New  Hampshire 
such  a  restriction  exists.  No  construction  is  per- 
mitted until  the  commissioners  shall  have  decided 
that  the  new  road  is  needed.^ 

The  argument  against  giving  such  power  to  com- 
missioners is  a  strong  one.  The  unrestricted  right 
to  build  railroads  is  a  constant  check  on  the  high 
charges  and  poor  service  of  all  roads.     It  is  a  menace 

'  See  Chauncey  M.  Depew's  testimony  before  the  Senate  Committee 
on  this  subject,  in  the  Railroad  Gazette,  May  lo,  1889. 


CONTROVERSIES.  63 

that  induces  the  old  road  to  reduce  its  charges  rather 
than  leave  open  the  temptation  of  possible  competi- 
tion. And  there  is  another  objection  to  the  New 
Hampshire  plan.  Restrictions  by  commissioners 
mean  the  corruption  of  those  commissioners.  The 
money,  power,  and  influence  of  great  systems  of 
railroads  are  not  easily  withstood.  By  their  tamper- 
ing with  the  commissioners  they  soon  would  render 
new  construction  an  impossibility.  The  history  of 
what  unscrupulous  railroad  methods  have  been  in 
the  past  tells  plainly  what  their  methods  will  be  in 
the  future.  The  danger  is  that  restrictions  on  con- 
struction will  be  worse  than  no  restrictions  at  all. 
The  railroads  themselves  will  manipulate  the  re- 
strictors. 

On  account  of  these  reasons  there  is  little  likeli- 
hood that  many  States  will  allow  the  railroad  com- 
missioners to  veto  the  building  of  new  railroads. 
The  remedy  for  the  useless  paralleling  of  lines  will 
be  found  in  the  consolidation  of  present  systems 
and  a  consolidation  to  such  an  extent  that  the  black- 
mailing projects  will  not  dare  to  contend  against  the 
formidable  strength  of  established  roads. 

FORECLOSURES    AND    REORGANIZATION  OF  CORPORATIONS. 

In  an  epigrammatic  way  it  has  been  said  that  a 
new  railroad  is  not  in  a  sound  physical  and  financial 
condition  until  the  bondholders  have  closed  out  the 
stockholders  and  a  receiver  has  closed  out  the  bond- 
holders. This  is  an  extreme  statement,  and  yet  it  is 
rare  that  a  newly  constructed  railroad  is  able  to 
avoid  insolvency  and  foreclosure.     The  money  for 


64        THE  CORPORATION  PROBLEM. 

its  construction  is  obtained  from  its  mortgage  bonds, 
while  its  stock  is  generally  pure  "water,"  and  repre- 
sents nothing  except  a  hope  of  future  value.  This 
hope  is  unfulfilled.  Interest  is  not  even  paid  on  the 
bonded  debt.  Foreclosure  of  the  mortgage  takes 
place,  and  so  often  has  this  been  the  case  that  rail- 
road bankruptcies,  foreclosures,  receiverships,  and 
reorganizations  have  come  to  be  looked  upon  in 
America  as  inevitable  accompaniments  of  railroad 
construction. 

The  injury  done  by  all  this  is  great  and  incalculable. 
Heavy  losses  fall  upon  the  investors  ;  confidence  in 
other  securities  is  weakened  ;  banks  become  fright- 
ened ;  credit  is  curtailed ;  a  railroad  war  is  frequently 
precipitated  by  the  bankrupt  road  or  its  receiver ;  a 
panic  and  crash  sometimes  result  ;  and,  in  all  cases, 
general  business  is  injured  by-  the  widespread  dis- 
trust. When  it  is  recollected  that  from  1876  to  1889 
nearly  four  hundred  and  fifty  railways  in  the  United 
States  were  sold  under  foreclosure,  the  losses  and  in- 
jtiry  therefrom  may  be  imagined  if  not  understood. 

These  foreclosures,  however,  do  not  proceed 
smoothly  to  judgment  and  sale.  The  stockholders 
and  officers  of  the  corporation  interpose  all  manner 
of  defences  and  dilatory  proceedings  in  the  suit,  and 
frequently  several  years  are  consumed  in  completing 
a  single  foreclosure.' 

The  result  of  all  this  is  great  loss  of  property  and 
disturbance  of  business,  and  these  losses  and  disturb- 
ances have  gone  to  such  an  extent  that  the  question 
has   arisen   whether   railroad    foreclosures    are    not 

*  Concerning  this  subject,  see  an  article  in  i  Ry.  &  Corp.  L.  J,, 
97  (1887). 


CONTROVERSIES.  65 

productive  of  more  evil  than  good,  and  whether  they 
ought  not  to  be  abolished  altogether. 

In  England,  foreclosures  of  railroad  mortgages  are 
not  allowed,  and  receivers'  certificates  have  no  exist- 
ence. Railroad  mortgages  are  a  lien,  not  on  the 
property,  but  on  the  income.  And  the  statutory 
law  of  England  prescribes  that  when  a  certain  pro- 
portion, generally  two  thirds  of  the  stockholders  and 
bondholders  and  general  creditors  of  an  insolvent 
railroad  company,  shall  agree  upon  a  plan  of  re- 
organization and  a  court  shall  approve  of  that  plan, 
then  the  remaining  one  third  are  bound  to  consent, 
and  the  reorganization  takes  place. 

In  America  no  such  law  exists,  but  there  has 
grown  up  a  business  settlement  of  these  foreclosure 
suits.  These  settlements  are  called  reorganization 
agreements,  and  they  are  fast  supplanting  the  fore- 
closures of  railroad  mortgages.  A  reorganization 
is  an  agreement  by  which  the  stockholders  and  gen- 
eral creditors  of  an  insolvent  company  agree  to 
reduce  the  amount  of  their  claims  against  the  corpora- 
tion and  also  agree  to  contribute  money  towards  re- 
establishing and  carrying  on  the  business.  There  is 
an  infinite  variety  of  plans  of  reorganization,  and  each 
plan  differs  in  some  particular  from  all  others,  but 
all  reorganizations  have  the  same  general  purpose.' 

'  Among  the  most  recent  and  favored  plans  is  one  whereby  the 
bondholders  cancel  their  bonds  wholly  or  partially  and  take  in 
exchange  the  preferred  stock  of  the  corporation.  This  plan  resem- 
bles the  present  policy  of  many  strong  railroads  to  take  up  and  pay 
ofT  their  bonds  from  moneys  received  by  new  issues  of  stock.  As 
regards  this  the  Railroad  Gazette,  February  8,  i88g,  says  : 

"  In  a  general  way,  it  is  a  good  thing  that  railroad  investment 
should  be,  as  far  as  possible,  in  the  form  of  stock.  The  stockholder 
S 


^  THE   CORPORATION   PROBLEM. 

The  object  of  a  reorganization  is  to  avoid  fore- 
closure, and  the  prospect  of  a  foreclosure  is  the 
cause  of  a  reorganization.  Frequently  the  reorganiza- 
tion is  made  after  a  foreclosure  has  been  commenced, 
the  object  of  the  foreclosure  being  to  cut  off  these 
persons  who  refuse  to  come  into  the  reorganization. 
Sometimes  the  reorganization  practically  does  away 
with  the  necessity  of  foreclosure,  and  this  is  the  ideal 
condition  towards  which  the  times  are  tending. 

The  time  probably  will  come  when  reorganization 
without  foreclosure  will  be  compelled  by  the  law  in 
America  the  same  as  in  England.  The  very  fact 
that  American  reorganizations  have  sprung  from 
the  necessities  of  business ;  that  they  have  grov/n 
up  outside  of  the  law ;  that,  though  voluntary  in 
their  creation,  they  have  supplanted  foreclosures; 
and  that  they  are  fair  and  necessary  to  the  business 
world,  leads  to  the  conviction  that  foreclosures  of 
railroad-mortgages  will  soon  be  prohibited  by  statute, 

exercises  more  immediate  control  over  the  management  than  the 
bondholder  can.  He  is  thus  able  to  look  out  for  himself,  and  take 
risks  with  his  eyes  open.  Bonded  debt  ought,  in  theory,  to  be  so 
small  as  to  be  subject  to  very  little  risk.  The  moment  the  margin 
of  safety  is  approached,  a  conflict  of  interest  arises  between  stock- 
holders and  bondholders  ;  and  the  stockholders,  having  the  board  of 
directors  under  their  more  immediate  control,  are  at  an  unfair 
advantage." 

The  advantages  to  the  railroad  are  :  the  decrease  of  its  debt,  the 
changing  of  its  liability  for  interest  to  a  liability  to  pay  dividends  in 
case  they  are  earned,  the  increased  value  of  all  the  stock  by  reason  of 
the  cancellation  of  debts,  the  avoidance  of  future  foreclosures,  the 
being  prepared  for  hard  times  and  for  railroad  wars  of  rates, 
and  the  possibility  of  borrowing  more  money  and  giving  a  new  first 
mortgage  to  other  persons  in  the  future. 


CONTROVERSIES.  6/ 

and  that  reorganizations  under  the  sanction  of  the 
law  will  take  their  place. 

STOCK    GAMBLING. 

Tacitus,  the  Roman  historian,  writing  of  the 
Germanic  races  in  the  year  99  A.D.  said  :  ''In  the 
character  of  a  German  there  is  nothing  so  remark- 
able as  his  passion  for  play.  Without  the  excuse  of 
liquor  (strange  as  it  may  seem),  in  their  cool  and 
sober  moments,  they  have  recourse  to  dice,  as  to  a 
serious  and  regular  business,  with  the  most  des- 
perate spirit  committing  their  whole  subtance  to 
chance,  and  when  they  have  lost  their  all,  putting  their 
liberty  and  even  their  persons  upon  the  last  hazard 
of  the  die.  The  loser  yields  himself  to  slavery. 
Young,  robust,  and  valiant,  he  submits  to  be  chained, 
and  even  exposed  to  sale.  Such  is  the  effect  of  a 
ruinous  and  inveterate  habit.  They  are  victims  to 
folly,  and  they  call  themselves  men  of  honor." 

It  was  from  these  Germanic  tribes  that  the  Anglo- 
Saxon  race  sprang.  The  daring  propensities  of  the 
race  have  led  to  the  enterprise  and  marvellous 
achievements  of  the  English-speaking  people,  but 
these  propensities  have  also  been  the  cause  of  gam- 
bling, speculation,  and  frightful  losses.  Ever  since 
shares  of  stock  came  into  existence — nearly  three 
hundred  years  ago — stock-gambling  has  been  an  evil 
among  the  people.  As  long  ago  as  the  year  1720,  a 
whirlwind  of  stock  speculation  swept  over  England, 
and  when  the  "  South  Sea  Bubble "  exploded,  it 
unsettled  the  finances  of  the  kingdom. 

The  periodical  regularity  with  which  the  English 


68  THE   CORPORATION   PROBLEM. 

nation  goes  into  wild  speculations  and  loses  its 
money  is  remarkable.  One  of  the  most  striking 
instances  of  this  was  prior  to  the  panic  of  1825.  The 
Annual  Register  of  that  day  described  the  scenes  as 
follows : 

"All  the  gambling  propensities  of  human  nature  were  constantly- 
solicited  into  action,  and  crowds  of  individuals  of  every  description, 
the  credulous  and  the  suspicious,  the  crafty  and  the  bold,  the  raw  and 
the  experienced,  the  intelligent  and  the  ignorant,  princes,  nobles,  poli- 
ticians, patriots,  lawyers,  physicians,  divines,  philosophers,  poets, 
intermingled  with  women  of  all  ranks  and  degrees,  spinsters,  wives, 
and  widows,  hastened  to  venture  some  portion  of  their  property  in 
schemes  of  which  scarcely  anything  was  known  except  the  name." 

In  these  latter  days  stock-gambling  still  prevails. 
It  has  assumed  colossal  proportions  and  has  ac- 
quired a  certain  respectability  by  reason  of  its  asso- 
ciation with  stock  investment.  Stock  gambling  and 
stock  investment,  however,  are  two  very  different 
affairs.  The  former  is  the  purchase  of  stock  in  the 
hope  that  the  price  will  quickly  go  up  or  down  so  as 
to  yield  a  profit.  The  latter  is  a  purchase  of  stock 
in  order  to  hold  it  for  dividends  or  for  an  eventual 
rise. 

Stock  gambling  is  carried  on  chiefly  through  two 
mediums — stock  exchanges  and  ''  bucket  shops." 

A  stock  exchange  is  a  place  where  stocks,  bonds, 
and  other  corporate  securities  are  bought  and  sold. 
The  exchange  consists  of  brokers.  They  alone  have 
the  privilege  of  buying  and  selling  in  a  particular 
exchange,  and  frequently  an  exchange  is  composed 
of  several  hundred  members.  The  amount  of  stocks 
bought  and  sold   on   one   of  these  exchanges  in  a 


CONTROVERSIES.  69 

single  day  is  remarkable.  It  sometimes  reaches 
1,000,000  shares.  And  yet  it  is  estimated  that  only 
one  eighth  of  these  transactions  is  for  investment, 
the  remaining  seven  eighths  being  pure  gambling. 

That  one  eighth  part,  however,  is  of  great  conse- 
quence to  the  country.  Without  the  stock  exchange 
railroads  and  corporations  requiring  great  capital 
could  not  sell  their  securities,  and  their  construction 
on  the  modern  scale  would  be  impracticable.  The 
stock  exchange  is  the  connecting  medium  between 
the  unknown  small  investors  and  the  great  captains 
of  industry'.  Through  it,  persons  with  a  little  sur- 
plus find  convenient  investments  ;  those  who  have 
stocks,  which  they  must  convert  into  cash,  find  a 
ready  market ;  staple  prices  for  securities  are  made  ; 
violent  fluctuations  in  the  whole  list  of  stocks  are 
prevented  ;  rascality  in  corporate  management  is 
exposed  ;  full  reports  of  the  corporate  condition  are 
brought  to  light,  scrutinized  and  criticised  ;  informa- 
tion as  to  values  is  widely  disseminated  ;  probable 
changes  in  values  are  anticipated  and  prepared  for ; 
and  through  the  stock  exchanges,  and  the  taking  of 
stocks  as  collateral  security,  the  conservative  influ- 
ence of  the  banks  is  felt  in  regulating  the  finances 
and  business  of  the  country. 

Some  idea  of  the  magnitude  and  scope  of  the  busi- 
ness of  a  stock  exchange  can  be  obtained  from  the 
following  article  which  appeared  in  October,  1890: 

"  The  magnitude  of  Wall  Street  monetary  transactions  sinks  into 
insignificarce  when  compared  to  the  business  daily  done  on  the  Lon- 
don Stock  Exchange.  The  number  and  the  quantity  of  the  stocks 
handled  in  the  British  capital  are  remarkable.     Id  this  market  the 


70  THE  CORPORATION  PROBLEM. 

whole  world  is  brought  into  financial  proximity,  and  the  business 
enterprises  of  the  entire  globe  are  made  the  medium  of  speculation. 
The  reports  of  the  business  done  on  any  day  in  the  London  Stock 
Exchange  show  this  to  be  the  truth.  Indeed,  the  foreign  and  colonial 
securities  dealt  in  here — governmental,  railway,  banks,  and  miscel- 
laneous industrial — far  outnumber  those  of  the  United  Kingdom. 

"  In  colonial  government  inscribed  securities  there  are  quoted  above 
par  those  of  Canada,  the  Cape  of  Good  Hope,  Natal,  New  South 
Wales,  New  Zealand,  South  Australia,  Tasmania,  Victoria,  and 
Western  Australia.  In  foreign  government  securities  are  found  in 
one  close  neighborhood  the  Argentine  Republic,  Brazil,  Buenos 
Ayres,  Chili,  China,  Costa  Rica,  Egypt,  France,  Greece,  Hungary, 
Italy,  Mexico,  Portugal,  Russia,  Spain,  Turkey,  Uruguay,  the  United 
States,  and  Virginia.  Of  these  securities  the  United  States  4  per 
cents  lead  all  others  in  value.  In  railway  securities,  stocks,  bonds, 
and  obligations,  the  list  is  almost  interminable,  and  the  roads  repre- 
sented lace  the  globe. 

"  Every  road  in  the  United  Kingdom  is  represented  in  the  daily 
dealings,  and  the  American  list  includes  everything  of  prominence 
in  the  United  States,  Canada,  Mexico,  and  Central  America.  There 
are  quotations  of  no  less  than  eight  different  Indian  railways,  and  the 
names  of  the  Bengal-Nagpur,  the  Bombay,  Baroda,  and  Central 
India,  the  Rohilkund  and  Kumaon,  and  the  Great  Indian  Peninsular 
are  as  familiar  to  the  London  stock-broker  and  the  London  speculator 
as  the  names  of  our  own  great  railways  are  to  the  Wall  Street  operator. 
There  are  a  dozen  or  more  South  American  railways  listed  and  liber- 
ally dealt  in,  and  close  beside  them,  in  the  quotations,  are  found  the 
Ottoman,  from  Smyrna  to  Aidin,  the  South  Austrian,  the  Dutch 
Rhenish,  the  Charkow-Krementschug,  and  many  others  that  sound 
odd  and  strange  to  New  York  ears. 

"  In  bank  stocks  the  array  is  imposing,  and  the  names  suggest  bonds 
of  commercial  interest  between  London  and  the  rest  of  the  world. 
There  are  the  Anglo-Egyptian  Bank,  the  Bank  of  Africa,  the  Bank 
of  Australasia,  the  Bank  of  New  South  Wales,  the  Bank  of  New 
Zealand,  the  Bank  of  South  Australia,  the  Bank  of  Tarapaca  and 
London,  the  Chartered  Bank  of  India,  Australia,  and  China,  the 
Hong  Kong  and  Shanghai  Bank,  the  Imperial  Bank  of  Persia,  the 
Imperial  Ottoman  Bank,  the  London  and  San  Francisco  Bank,  and 
the  London  Bank  of  Mexico  and  South  America.  In  mines  the 
transactions  are  large  and  extend  from  the  gold  fields  of  South  Africa 


CONTROVERSIES.  7 1 

to  the  silver  diggings  on  the  western  slopes  of  the  Rocky  Mountains, 
and  from  the  diamond  mines  of  Brazil  to  the  copper  finds  of  Lake 
Huron.  Telegraph  and  telephone  stocks  are  dealt  in,  and  the  quota- 
tions show  a  juxtaposition  of  the  Anglo-American,  the  Direct  United 
States  Cable,  the  Cireat  Northern  of  Copenhagen,  the  Western  and 
Brazilian,  and  the  West  India  and  Panama. 

"Corporation  stocks  represent  such  distant  places  from  London  as 
Melbourne,  Buenos  Ayrcs,  and  the  city  of  Mexico.  In  foreign 
stocks,  bonds,  etc.,  coupons  payable  in  London  or  abroad,  there  are 
copiously  represented  the  Argentine  Republic,  Brazil,  Buenos  Ayres, 
Chili,  China,  Colombia,  Cordova,  Ecuador,  Egypt,  Greece,  Costa 
Rica,  Guatemala,  Hungary,  Mexico,  Nicaragua,  Paraguay,  Portugal, 
Russia,  Spain,  Sweden,  Turkey,  and  L^ruguay.  Breweries  are  made 
a  conspicuous  means  of  investment  and  speculation,  and  we  find  the 
Chicago,  Frank  Jones,  and  St.  Louis  breweries  quoted  with  those  of 
Allsopp,  Guinness,  Bamsley,  Ohlsson's  Cape,  and  Watney  &  Co. 

"  Commercial  and  industrial  enterprises  have  a  wide  range,  and 
extend  from  the  forges  of  Leeds  to  the  water  supply  of  Buenos  Ayres. 
Financial,  land,  and  investment  enterprises  embrace  concerns  operat- 
ing in  America,  Australia,  New  Zealand,  the  Transvaal,  Peru,  and 
numerous  other  countries  remote  from  each  other,  and  having  no 
interest  in  common  except  those  created  by  the  London  stock  market 
and  existing  on  the  London  Exchange. 

*'  In  addition  to  these  dealings  in  foreign  securities,  stocks,  bonds, 
mines,  railways,  land  investments,  and  commercial  and  industrial 
enterprises,  the  business  done  in  British  railways,  banks,  financial 
trusts,  gas  companies,  insurance  concerns,  tramways,  omnibus  com- 
panies, water-works,  and  other  domestic  and  local  stocks  is  stupen- 
dous. The  daily  transactions  of  the  London  Stock  Exchange  disclose 
a  marvellous  diversity  of  interests  spreading  over  the  entire  civilized 
globe,  and  yet  focused  in  one  place  for  the  purposes  of  investment 
and  speculation.  It  is  a  wonderful  community  of  interests,  a  mar- 
vellous transformation  of  the  business  world  into  one  close  neighbor- 
hood, and  it  suggests  the  idea  that  the  people  of  Great  Britain  not 
only  have  a  great  deal  of  money,  but  they  are  anxious  to  use  it  in 
either  investment  or  speculation." 

But  the  gambling  portion  of  the  stock  exchange 
business  causes  unutterable  woe  and  ruin.  Thou- 
sands of  men  fall  into  that  maelstrom  ever>^  year. 


72        THE  CORPORATION  PROBLEM. 

Stock-gambling  is  a  mania  that  unsettles  the  minds 
of  men  and  unfits  them  for  serious,  earnest  business. 
It  breaks  up  homes,  disgraces  families,  beggars  the 
rich,  and  often  leads  to  suicide.  Men,  whose  legiti- 
mate income  is  decreasing  and  whose  expenses  are 
increasing,  resort  to  the  stock  exchange  in  despair, 
and  risk  all  on  the  venture.  Moreover,  the  whole 
country  is  affected  when  a  great  syndicate  are 
gambling  in  a  particular  stock  on  a  colossal  scale, 
and  are  jeopardizing  vast  business  interests.  The 
credit  of  banks  and  the  solvency  of  railroads  are  the 
pawns  with  which  they  are  playing.  If  their  gam- 
bling does  not  win,  there  comes  a  collapse  of  their 
credit  and  business,  a "  run  "  on  banks,  railroad 
foreclosures  and  receiverships,  wars  in  rates,  and 
widespread  disaster.  The  South  Sea  Bubble  of 
1720  has  been  frequently  repeated,  and  one  of  the 
latest  instances  was  the  collapse  of  the  West  Shore 
Railroad  syndicate,  which  created  a  panic  in  Wall 
Street  and  carried  down  the  Metropolitan  Bank. 

The  bucket  shop  is  worse  than  the  stock  ex- 
change, in  that  it  has  no  redeeming  features.  It  is 
purely  and  simply  a  gambling  den  and  sink  of  in- 
iquity. It  is  the  kindergarten  and  hospital  of  the 
stock  exchange.  It  does  more  evil  than  a  stock  ex- 
change, because  it  is  cheap,  it  deals  in  small  stakes, 
and  it  establishes  itself  in  the  smaller  as  well  as  the 
larger  cities,  villages,  and  towns.  It  enables  impecu- 
nious clerks  and  employees  to  gamble  with  facility. 
Moreover,  it  is  never  the  medium  of  investment. 
There  are  about  five  thousand  of  these  bucket 
shops  in  the  country.     They  take  stakes  as  low  as 


CONTROVERSIES.  73 

five  dollars,  but  their  aggregate  business  amounts  to 
millions  daily.  They  get  telegraphic  quotations  of 
prices  from  New  York  and  Chicago,  and  they  take 
orders  from  customers  for  the  purchase  of  any  stock. 
The  customer  does  not  pay  for  his  purchase,  but  he 
deposits  money  to  pay  the  loss  in  case  his  purchase 
declines  in  value  before  the  deal  is  closed.  If  his 
purchase  goes  up,  then  the  customer  is  entitled  to 
the  gain,  in  addition  to  receiving  back  his  deposit. 
If  it  goes  down  he  loses  his  deposit.  It  is  gambling, 
and  gambling  of  the  worst  type. 

Various  remedies  have  been  tried  to  prevent  stock- 
gambling.  Statutes  have  been  passed.  In  Illinois, 
Ohio,  Pennsylvania,  and  other  States,  the  courts 
favor  these  statutes,  and  by  enforcing  them  have 
rendered  stock  gambling  somewhat  dangerous.  In 
New  York  and  other  States  the  courts  have  lent  little 
aid  in  the  suppression  of  the  vice.  Recently,  how- 
ever, a  new  and  stronger  enemy  of  the  bucket 
shop  has  been  very  active.  The  business  of  the 
stock  exchange  has  been  dwindling  away.  One 
cause  of  the  decline  is  the  flourishing  condition  of 
the  bucket  shops,  which  seem  to  be  doing  nearly 
all  the  business.  Accordingly  the  exchanges  are 
waging  war  on  them  by  withholding  quotations, 
and  are  trying  to  root  them  out.  This  curious 
and  interesting  struggle  has  the  approval  of  the 
public. 

STRIKES. 

One  of  the  most  important  features  of  modern 
times  is  the  rise  of  the  laboring  classes  to   political 


74  THE   CORPORATION   PROBLEM. 

and  industrial  power.  Their  political  power  is  seen 
in  the  passing  of  laws  lessening  the  hours  of  labor, 
creating  more  holidays,  prohibiting  the  competition 
of  prison  work,  regulating  the  employment  of  women 
and  children,  and  a  host  of  lesser  laws.  This  politi- 
cal power  of  the  workingmen  is  due  to  the  power  of 
the  ballot.  Their  industrial  power  is  of  more  recent 
origin.  It  is  due,  not  to  co-operation  or  profit-shar- 
ing, or  the  saving  and  investment  of  wages,  but  to 
the  power  of  the  ''  strike." 

A  strike  exists  when  a  number  of  employees  quit 
work  until  their  wages  are  raised,  or  hours  of  labor 
decreased,  or  some  other  grievance  is  righted. 
Formerly  every  strike  was  made  by  itself,  and  the 
group  of  laborers  involved  in  it  were  not  aided  by 
or  connected  with  any  other  group  of  laborers. 
But  within  the  past  few  years  the  laboring  men 
have  learned  the  power  of  organization.  They  have 
united,  and  the  labor  organizations  of  the  present 
day  possess  a  membership  of  hundreds  of  thousands, 
and  have  extended  their  power  over  the  entire 
country.  The  Knights  of  Labor  is  the  largest  of 
.these  organizations,  including  in  its  ranks  all  grades 
of  manual  workmen.  The  Brotherhood  of  Locomo- 
tive Engineers  is  another  widespread  but  more 
conservative  organization.  And  there  are  others, 
fantastic  in  name,  but  similar  in  their  purpose  of 
increasing  wages,  decreasing  hours  of  labor,  and 
promoting  the  well-being  of  the  members. 

A  strike  is  not  always  resorted  to  in  order  to  ac- 
complish these  ends.  Demands  are  first  made  upon 
the  employers ;    then  come  negotiations   and   argu- 


CONTROVERSIES.  75 

ments  ;  and  compromises  and  arbitrations  arc  often 
brouglit  about.  If  all  these  fail,  the  strike  follows. 
The  men  lose  their  wages,  but  the  employers  must 
stop  their  business  wholly  or  partially.  The  ques- 
tion then  is  who  can  afford  to  wait  the  longer, 
the  men  or  the  employer.  The  employer  seeks  to 
employ  other  men,  but  these  are  generally  unskilled 
and  unsatisfactory.  Moreover  the  strikers  seek  to 
dissuade  the  new  men  from  w^orking,  and  sometimes 
attack,  terrify,  and  prevent  them  from  continuing 
work. 

Corporations  are  peculiarly  subject  to  strikes,  be- 
cause corporations  carry  on  the  great  enterprises  of 
the  countr}'.  Especially  is  the  strike  a  common  oc- 
currence on  railroads.  The  Pittsburgh  strikes  of 
1877  led  to  riots,  bloodshed,  the  interference  of 
troops,  and  the  destruction  of  $30,000,000  of  railroad 
property.  The  engineers'  and  firemen's  strike  on  the 
Chicago,  Burlington,  &  Quincy  Railroad  in  1887-8 
lasted  for  months,  caused  a  loss  in  the  company's 
business  of  millions  of  dollars,  and  by  reason  of  the 
employment  of  new  men  led  to  many  fatal  accidents 
and  collisions.  In  both  of  these  instances  the 
strikers  were  beaten.  But  frequently  they  succeed. 
The  statistics  of  the  Bureau  of  Statistics  of  Labor  of 
the  State  of  New  York,  published  in  1890,  show  that 
of  all  the  strikes  in  five  years,  47  per  cent,  were  suc- 
cessful, and  15  per  cent,  were  compromised.  Of  the 
strikes  for  high  wages,  and  for  or  against  changes  in 
hours  of  labor,  54  per  cent,  were  successful,  and  18 
per  cent,  were  compromised.  Of  strikes  against  dis- 
charge of  union  men  and  others  of  this  class,  34  per 


76  THE   CORPORATION   PROBLEM. 

cent,  were  successful,  and  27  per  cent,  were  com- 
promised. ' 

A  successful  strike  is  a  gain  to  the  laboring  man. 
It  enables  him  to  work  less  hard,  or  for  a  shorter 
time,  and  it  increases  his  wages,  or  gives  him  more 
time  for  recreation,  self-improvement,  and  rest.  All 
these  things  tend  to  improve  the  physical,  social, 
mental,  and  moral  life  of  the  laboring  people,  and  it 
is  to  be  borne  in  mind  that  anything  which  tends  to 
improve  them  tends  to  improve  the  character  and 
protect  the  future  of  the  American  nation  itself. 

It  is  very  doubtful,  however,  whether  strikes  or  any 
other  power  can  prevent  the  wages  of  the  unskilled 
labor  of  America  from  going  down  to  the  level  of  Euro- 
pean wages.  The  unskilled  labor  of  all  nations  com- 
bined is  like  avast  sea  which  continually  seeks  a  level. 
If  wages  are  higher  in  America  than  in  Europe,  Euro- 
pean labor  will  flow  into  America  until  a  level  in 
wages  is  reached,  either  by  the  raising  of  wages  in 
Europe  or  the  lowering  of  wages  in  America.  A 
prohibitory  law  excluding  immigration,  such  as  ex- 

^  The  New  York  Record  and  Guide  for  September  6,  i8go,  says  : 
' '  The  business  of  transportation  is  among  the  very  few  industries 
in  which  strikers  usually  inflict  greater  injuries  than  they  suffer. 
From  twenty-two  thousand  strikes  investigated  by  the  National 
Bureau  of  Labor,  it  was  estimated  that  the  employees  suffered  a  loss 
aggregating  about  $51,800,000,  while  from  the  same  strikes  the  loss 
suffered  by  the  employers  was  only  about  $30,700,000.  These 
strikes  were  distributed  through  thirty-eight  industries,  and  in  all  but 
three  or  four  of  these  the  balance  of  loss  was  on  the  side  of  the 
strikers.  Among  the  few  in  which  the  balance  was  on  the  other  side, 
almost  the  only  important  industry  was  that  of  transportation.  In 
this  industry,  the  aggregate  loss  to  employees  was  $2,089,494,  while 
to  the  employers  the  loss  was  $6,267,558." 


CONTROVERSIES.  7/ 

eludes  the  Chinese,  would  prevent  this  flow  and 
equalization  of  labor.  But  such  an  exclusion  of 
European  labor  is  impracticable,  and  the  unskilled 
labor  of  all  lands  is  destined  to  meet  on  a  level.  A 
protective  tariff  cannot  prevent  it.  Neither  can  the 
strikes  of  American  labor  prevent  it.  The  strikes 
may  possibly  aid  skilled  labor,  and  it  may  even  im- 
prove, temporarily,  the  condition  of  unskilled  labor. 
Education  will  lift  to  a  higher  level  those  who  have 
its  advantages,  but  eventually  the  natural  increase  of 
population  and  the  great  immigration  from  Europe 
will  regulate  wages.  As  against  these  powers  the 
strike  will  sink  into  impotence  and  insignificance. 

But,  meantime,  the  strike  is  interfering  with  busi- 
ness, and  is  causing  great  loss  to  employer  and 
employee.  Hence  one  of  the  leading  questions  of 
the  day  is  how  to  solve  the  problem  of  the  strike. 

State  boards  of  arbitration  have  been  proposed, 
and  such  a  board  exists  in  New  York  State.  But  the 
trouble  is  that  the  decision  of  the  board  is  not  binding 
on  the  parties.  The  board  may  compel  witnesses  to 
testify,  but  cannot  compel  the  parties  to  submit  to  its 
decision.  Public  opinion  may  be  affected  by  the 
decision,  and  a  flood  of  light  may  be  let  in  on  the 
facts  of  a  particular  strike.  But  unless  the  parties 
voluntarily  obey  the  decree,  the  decision  of  the 
board  is  worthless. 

Insurance  by  the  railroads  of  their  employees 
against  accidents,  sickness,  and  loss  of  life,  is  being 
tried.  The  Pennsylvania,  and  the  Chicago,  Burling- 
ton, &  Quincy  Railroads,  particularly,  are  making 
far-reaching  experiments   in   this  direction — experi- 


78  THE   CORPORATION   PROBLEM. 

ments  which,  if  successful,  will  in  large  part  weld 
together  the  interests  of  railroads  and  their  em- 
ployees/ 

Still  another  remedy  is  that  of  giving  the  em- 
ployees some  portion  of  the  profits  of  the  business. 
Various  methods  of  effecting  this  result  have  been 
proposed,  and  some  of  them  have  been  tried.  In 
the  case  of  manufacturing,  mercantile,  and  industrial 
enterprises,  a  certain  degree  of  success  has  been 
attained  in  this  direction  ;  but  in  railroads  the  em- 
ployee is  still  far  from  being  a  stockholder.  Never- 
theless it  is  true  that  if  the  day  ever  comes  when 
the  wage  earner  is  the  wage  sharer  in  railroads,  the 
railroad  strike  will  be  a  thing  of  the  past.' 

Finally  another  and  radically  vicious  remedy  has 
been  proposed.  It  is,  as  usual,  a  plan  for  further 
legislation,  with  all  the  mistakes  and  incompetency 
that  such  legislation  generally  involves.  It  has  been 
proposed  that  the  legislature  shall  enlist  railway 
employees  as  soldiers,  and  punish  a  striker  as  a  de- 
serter;  or  shall  require  notice  of  a  strike  to  be  given ; 
or  shall  punish  all  railway  strikes  as  penal  offences ; 
or  shall  give  the  boards  of  arbitration  the  power  to 
enforce  their  decisions,  and  to  punish  a  refusal  to 
abide  by  them.  But  all  these  schemes  ill  accord 
with  Anglo-Saxon  ideas  of   personal  liberty.     The 

^  The  details  of  these  insurance  plans  are  given  in  Chapter  HI. 

Charles  Francis  Adams  suggests  as  a  remedy  for  strikes  :  (i)  the 
establishment  of  an  employees'  fund,  (2)  railroad  educational  insti- 
tutions, and  (3)  a  tribunal  consisting  of  a  small  committee  of  the 
employees  to  meet  the  directors  in  reference  to  disagreements  and 
complaints.     See  Scrihier  s  Magazine,  April,  i88g. 

'See  Chapter  III.,  infra,  on  this  question  of  co-operation. 


CONTROVERSIES.  79 

inherent  right  of  a  man  to  unite  with  others,  and  to 
go  and  come,  and  work  when  he  pleases,  is  of  greater 
consequence  than  the  business  prosperity  of  rail- 
roads or  the  convenience  of  the  public.  Although 
there  are  times  when  personal  liberty  must  yield  to 
the  necessities  of  the  state,  yet  never  should  it  be 
sacrificed  to  the  necessities  of  railroad  transporta- 
tion.' 

*'  Two  ways  of  dealing  with  these  evils  have  been  tried  in  Europe, 
either  of  which  seems  to  be  a  partial  remedy,  but  neither  of  which 
seems  to  commend  itself  to  Americans.  The  first  is  to  impose  a 
heavy  per  diem  fine,  or  even  forfeiture  of  charter,  upon  any  corpora- 
tion that  fails  to  perform  its  public  functions.  This  forces  the  com- 
pany to  make  terms  of  some  kind  with  the  strikers.  .  .  .  The 
second  European  method  of  guarding  the  public  against  the  loss  of 
strikes  is  to  make  it  a  misdemeanor  for  any  employee  to  quit  work 
without  giving  (say)  five  days'  notice."  ^ 

'  A  special  report  of  the  New  York  State  Board  of  Arbitration,  in 
1890,  urged  the  enactment  of  a  law  that  entrance  into  railway  service 
shall  be  by  enlistment  for  a  definite  period,  upon  satisfactory  exam- 
ination as  to  mental  and  physical  qualifications,  with  oath  of  fidelity 
to  the  people  and  to  the  corporation  ;  that  resignations  or  dismissals 
from  such  ser\-ice  shall  be  permitted  for  cause,  to  be  stated  in  writing 
and  filed  with  some  designated  authority,  and  to  take  effect  after  a 
lapse  of  a  reasonable  and  fixed  period  ;  and  that  any  combination  of 
two  or  more  persons,  to  embarrass  or  prevent  the  operation  of  a  rail- 
road in  the  service  of  the  people,  shall  be  a  misdemeanor.  See  Ry. 
&  Corp.  L.  J.,  Feb,  7,  1S91. 

It  may  be  well  to  consider  whether  such  a  body  of  industrial 
soldiery  would  be  conducive  to  the  continuance  of  republican  institu- 
tions and  the  independence  of  these  citizens  themselves. 

'  Professor  Amos  G.  Warner,  of  the  University  of  Nebraska,  in  the 
Popular  Science  Monthly,  July,  1890. 

The  Xew  York  Record  and  Guide  for  Sept.  6,  1890,  says  : 

"  In  some  European  countries  it  is  against  the  law  for  a  workman  to 
quit  work  without  giving  five  days'  notice.     If  he  violates  this  law  he 


80  THE   CORPORATION  PROBLEM. 

If  the  legislatures  will  cease  to  interfere,  the  labor 
question  will  be  solved  by  the  American  railroads 
themselves.  Events  are  moving  in  that  direction 
rapidly  and  effectively.'  A  solution  is  inevitable 
and  must  be  had,  and  the  intellect  and  clear  vision 
of  the  railroad  managers,  brought  to  bear  upon  this 
question  by  their  interest,  are  far  more  competent 
to  deal  with  the  problem  than  are  the  political 
time-servers  of  State  legislatures. 

The  American  public,  with  characteristic  good-na- 
ture, endures  the  inconvenience  and  loss  of  business 
incident  to  strikes,  and  believes  that  the  problem 
should  solve  itself;  that  State  legislatures  are  neither 
intended  nor  competent  to  cope  with  it ;  and  that 
there  should  be  no  legislation  subservient  to  railroad 
interests. 

FRAUDS    ON    STOCKHOLDERS    AND    CREDITORS. 

In  these  money-making  and  money-seeking  times 
the  immense  gains  and  profits  of  corporations  have 

is  subject  to  fine  or  imprisonment.  After  the  Burlington  strike,  one  of 
the  religious  weeklies  wrote  to,  or  interviewed,  various  leading  rail- 
way men  and  labor  leaders  regarding  the  feasibility  of  introducing 
such  a  law  in  this  country,  coupled  with  a  provision  for  compulsory 
arbitration.  The  representatives  of  the  labor  organizations,  among 
whom  were  Messrs.  Powderly  and  Arthur,  seemed  more  willing  to 
accept  the  double  proposition  than  the  railway  men.  The  latter  held 
that  the  part  of  the  law  tending  to  curb  the  workmen  could  never  be 
enforced,  and  that,  therefore,  the  advantage  from  the  double  enact- 
ment would  be  all  on  the  side  of  the  laborer  ;  if  the  arbitrators  to 
whom  a  matter  in  dispute  was  given  decided  favorably  to  the  men, 
the  road  must  abide  by  the  decision,  but  if  the  decision  favored  the 
road,  the  men  could  not  be  compelled  to  abide  by  it." 
*  See  Chapter  III, 


CONTROVERSIES.  8 1 

not   always   been    honestly    preserved  and  adminis- 
tered for  the  benefit  of  those  who  are  entitled  there- 
to— the  stockholders  of  the  company.     Corporations, 
with    their  vast  capital   stock,   their  great    income, 
their   rapidly  changing  personal  property  and  their 
large  purchases  and  sales,  have  proved  to  be  a  source 
of  temptation  which  corporate  officers  are  too  often 
unable  to  withstand.     These  companies  have  been 
found  to  be  efficient  instruments  of  fraud,  specula- 
tion, plunder,  and  illegal  gain.     In  these  latter  days 
the  spoliation  of  corporations  and  stockholders  by 
the  corporate  directors  and  managers  have  been  sys- 
tematized into  well-known  methods  of  proceeding, 
and  the  carrj'ing  out  of  such  plans  has  become  a  pro- 
fession   and    an    accomplishment.      Skill,   audacity, 
experience,  and  administrative  talent  of  the  highest 
order  have  reduced  to  a  certainty  the  methods  of 
diverting  the  profits,  capital,  and  even  the  existence 
of  the  corporation  itself,  to  the  enrichment  of  the  cor- 
porate managers  and  their  co-conspirators.     Corpo- 
rations become  insolvent  and  stockholders  lose  their 
investment,  while   individuals  become   millionaires. 
Illegitimate  gains  are  secured  and  enorrnous  fortunes 
>.re  amassed  by  the  few,  at  the  expense  of  the  de- 
frauded but  generally  helpless  stockholders. 

The  expense,  difficulty,  and  delays  of  litigation  ; 
the  power,  w'ealth,  and  unscrupulousness  of  the 
guilty  parties :  the  secrecy,  skill,  and  evasive  nature 
of  their  methods;  and  the  fact  that  the  results  of 
even  a  successful  suit  belong  to  the  corporation,  and 
not    to  the   stockholders   who   sue,  all  combine  to 

baffle  investigation  and  exposure,  to  discourage  the 
6 


82  THE   CORPORATION   PROBLEM. 

stockholders,  and  to  encourage  and  protect  the 
parties  guilty  of  the  wrong. 

In  England,  ever  since  the  time  of  the  South  Sea 
Bubble,  there  has  been  a  constant  recurrence  of 
"  bubble  companies  "  and  dishonest  promoters.  The 
English  reports  are  filled  with  cases  of  frauds  of  cor- 
porate directors,  corporate  agents,  and  corporate 
organizers.  A  system  of  jurisprudence  has  grown  up 
from  these  cases.  This  system,  however,  is  as  yet  in 
a  formative  state ;  and  there  is  no  branch  of  the  law 
more  complicated,  difficult,  and  uncertain  than  that 
growing  out  of  the  frauds  of  corporate  directors. 

In  America  the  cases  involving  a  breach  of  trust 
by  the  directors  arise  generally  out  of  the  manage- 
ment of  corporations  and  not  in  their  formation. 
These  cases  often  involve  vast  transactions,  and  ex- 
hibit a  remarkable  talent  for  railway  management 
and  manipulation.  They  have  commanded  the 
stockholder's  admiration  as  well  as  aroused  his  in- 
dignation. Mr.  Acworth,  the  English  writer,  says 
that  "  hatred  itself  can  deny  to  American  railway 
management  no  title  to  glory  except  virtue."  * 

The  American  faculty  for  organization,  executive 
management,  and  the  invention  and  adoption  of 
means  to  ends  has  been  very  largely  engaged  in  the 
development  and  management  of  the  American  rail- 
roads. But  this  management  has  not  always  been 
honest.  The  ingenuity  and  fruitful  cunning  of 
adroit,  experienced,  and  unscrupulous  men  have 
plundered  and  robbed  the  corporations  and  the 
stockholders,   and    have    brought    reproach    on    the 

'  "  The  Railways  and  the  Traders,"  p.  9. 


CONTROVERSIES.  83 

management  of  the  American  railway.  Great  for- 
tunes have  been  accumulated  by  wrecking  great 
corporations.  Railroads  which  were  capable  of 
earning  a  fair  return  upon  the  capital  invested  have 
been  rendered  insolvent  by  the  fraudulent  manage- 
ment and  illegal  gains  of  the  corporate  officers.  The 
methods  of  accomplishing  this  result  have  been  sys- 
tematized and  elaborated  to  a  remarkable  degree. 
The  wrecking  of  a  corporation  is  done  in  number- 
less ways. 

Professor  E.  J.  James  says  in  regard  to  this  sub- 
ject : 

"  It  was  found  again  that  the  directors  of  the  railroads,  even  where 
they  have  been  constructed  with  some  reference  to  honesty  and 
economy,  had  interests  which  were  not  necessarily  the  same  as  those 
of  the  rest  of  the  corporation  or  of  the  public.  For  example,  the 
directors  were  often  interested  in  manufacturing  or  trading  enter- 
prises where  it  was  necessary  to  resort  to  the  railroads  in  the  course  of 
their  business.  By  giving  to  themselves,  as  directors,  special  rates 
and  privileges,  it  was  possible  to  build  up  their  own  business  at  the 
expense  of  rivals,  thereby  practically  depriving  the  public  of  free 
competition  in  the  particular  branches  of  industry  on  the  one  hand, 
and  cheating  their  fellow-stockholders  on  the  other  hand,  by  lessen- 
ing by  so  much  the  possibilities  of  income,  and  consequently  the  fre- 
quency or  size  of  dividends. 

'*  It  was,  moreover,  possible  for  the  directors  to  form  companies  of 
all  kinds  for  the  purpose  of  supplying  the  parent  company  with  sup- 
plies, or  of  doing  certain  kinds  of  business  for  it,  and,  in  their  ca- 
pacity as  directors  of  the  parent  companies,  awarding  to  themselves 
as  directors  of  the  barnacle  companies  fat  contracts  of  all  sorts,  which 
increased  the  expenses  of  the  road,  raised  the  charges  of  service,  thus 
cheating  the  public  on  the  one  hand  and  the  stockholders  on  the  other. 

"  It  was  also  found  that  directors  could  grant  special  rates  to  men 
who  brought  business  to  the  railroad  on  condition  that  the  latter 
would  pay  them  handsomely  as  individuals  for  using  their  power  as 
directors  or  officials  for  their  benefit. 


84        THE  CORPORATION  PROBLEM. 

"As  examples  of  the  deals  within  the  railway  itself,  none  were 
more  common  than  for  some  of  the  directors  of  a  railroad  to 
build  a  branch  railroad,  and  then,  after  stocking  and  bonding  it 
heavily,  sell  it  out  to  the  parent  road  at  a  high  valuation.  Among 
the  minor  though  most  common  forms  of  this  kind  of  illegitimate 
manipulating,  should  be  mentioned  that  by  which  the  directors  of  a 
road  buy  up  real  estate  in  a  certain  locality  and  then  place  a  station 
there  so  as  to  enhance  the  value  of  their  property  ;  or  where  they 
charge  more  in  the  neighborhood  of  a  large  city  for  a  fare  to  a  near 
station  where  they  do  not  own  land  than  to  a  more  distant  one  where 
they  do  own  real  estate  which  they  are  eager  to  sell."  ^ 

And  Professor  Warner  says  : 

"  Probably  real-estate  speculators  are  more  often  responsible  for 
the  building  of  superfluous  roads  than  any  other  one  class.  The  Lin- 
coln Land  Company  has  operated  along  the  line  of  nearly  all  the  ex- 
tensions of  the  Burlington  &  Missouri  River  Railroad.  It  is  made 
up  largely  of  resident  railroad  officials,  who  are  high  enough  up  in  the 
councils  of  the  company  to  secure  prompt  information  as  to  proposed 
extensions,  and  to  have  considerable  weight  in  shaping  the  course  of 
lines  actually  building.  Members  of  such  a  company  derive  profit 
from  all  extensions  whether  called  for  or  not  ;  and  while  their  inter- 
ests as  railroad  managers  may  usually  outweigh  their  interests  as  land 
speculators,  yet  this  is  not  always  true.  The  influence  of  such  men 
upon  the  companies  is  seconded  by  the  influence  of  local  real-estate 
dealers  in  the  districts  through  which  a  proposed  road  is  to  pass. 
\Miatever  may  be  the  results  of  building  a  new  line  to  the  commu- 
nity as  a  whole,  the  owners  of  real  estate  along  its  route  are  sure  to 
profit  by  its  construction."  ' 

In  all  cases,  however,  the  object  sought  is  to  trans- 
fer the  corporate  assets  from  the  corporation  to  the 
parties  who  are  in  control.  The  most  common 
methods  of  accomplishing  this  result  are  by  selling 
the  corporate  property  at  a  low  price ;  or  purchasing 
property  for  it  at  a  high  price  ;  or  entering  into  con- 

^  James  on  "The  Railway  Problem." 

^  Political  Science  Quarterly,  vol.  vi.,   No.  I. 


CONTROVERSIES.  85 

tracts  on  ruinous  terms  ;  or  mortgaging  the  property 
so  as  to  cut  off  stockholders  and  unsecured  creditors  ; 
or  depriving  the  corporation  of  its  business,  profits, 
and  assets,  and  precipitating  a  foreclosure  and  re- 
ceivership which  leaves  little  property  even  for  the 
first  mortgage  bondholders  themselves.  In  all  these 
various  schemes,  the  parties  controlling  the  corpora- 
tion are  interested  openly  or  secretly  with  those 
who  are  contracting  with  the  corporation.  The 
profits  and  property,  which  are  lost  to  the  corpora- 
tion, its  minority  stockholders,  and  its  creditors, 
are  gained  by  those  who  control  the  corporation 
itself. 

The  law  condemns  these  practices,  but  is  inade- 
quate to  prevent  them.  Remedies  have  been  pro- 
posed, more  or  less  effective  and  severe.  Some  of 
them  aim  to  reach  the  whole  difficulty,  but  most 
of  them  attack  only  some  specific  wrong.  It  is  well 
to  consider  these  remedies  separately. 

A  restriction  on  the  borrowing  and  mortgaging 
power  of  corporations  has  been  advocated,  and  with 
reason.  By  the  common  law,  the  directors  borrow 
money  arid  mortgage  the  corporate  property.  If 
they  are  dishonest,  improvident,  or  have  sold  the 
stock  "  short,"  the  stockholders  are  powerless  and 
the  corporation  may  be  wrecked  before  another 
election  takes  place.  It  is  with  good  cause  that 
it  has  been  proposed  that  the  legislature  should 
place  the  borrowing  and  mortgaging  power  in  the 
hands  of  the  stockholders  and  take  it  away  from 
the  directors. 

Mr.  Henry  Hitchcock,  of  St.  Louis,  in  the  annual 


^6  THE   CORPORATION   PROBLEM. 

address    before    the    American    Bar   Association    in 
1887,  said  as  to   this  question  : 

"  No  private  corporation  should  be  permitted  to  create  any  bonded 
or  mortgage  indebtedness,  as  distinguished  from  current  liabilities  or 
floating  debt,  until  the  entire  capital  stock  is  paid  up, — nor  then 
without  the  consent  of  the  stockholders  specially  given  at  a  meeting 
called  for  that  purpose  (as  now  provided  by  the  constitutions  of 
several  States),  nor  without  proper  restrictions  both  as  to  the  total 
amount  of  such  indebtedness,  which  the  New  York  Business  Corpo- 
ration Act  limits  to  one  half  the  value  of  the  corporation  property, 
and  as  to  the  uses  to  which  money  so  borrowed  may  be  applied. 

"  No  private  corporation  should  be  allowed,  under  any  circum- 
stances, to  incur  current  liabilities  or  floating  debt  beyond  a  fixed 
proportion — not  exceeding  two  thirds — of  the  actual  cash  market 
value  of  its  unencumbered  assets  ;  directors  permitting  any  violation 
of  such  requirement  to  be  personably  liable  for  the  corporate 
debts."  1 


'  Professor  Warner  says  in  regard  to  this  :  ' '  Abuse  of  the  borrow- 
ing power  is  certainly  a  very  common  sin  among  artificial  persons, 
and  especially  among  American  railways.  When  the  holders  of 
a  small  amount  of  stock,  only  partially  paid  in,  build  a  road  with 
borrowed  money,  the  limitation  of  their  liability  shields  them  from 
personal  loss  ;  while  their  power  of  voting  themselves  salaries,  and  of 
concluding  profitable  contracts  either  with  themselves  or  friends, 
gives  them  great  opportunities  for  personal  profit  irrespective  of  the 
success  of  the  road.  The  last  report  of  the  statistician  of  the  Inter- 
state Commerce  Commission  shows  that  many  of  the  minor  and 
branch  lines  of  the  country  have  been  built  wholly  with  borrowed 
money — that  is,  they  are  bonded  to  their  full  cost  value.  Many  of 
the  longer  and  independent  roads  are  bonded  at  half  to  three  fourths 
of  their  entire  capitalization.  The  total  bonded  debt  of  the  rail- 
roads of  the  United  States  is  actually  greater  than  the  total  of  their 
share  capital ;  and  this,  although  the  amount  of  water  in  the  stocks 
is  much  larger  than  in  the  bonds.  As  the  possession  of  the  majority 
of  the  stock  gives  control  over  all  the  capital  invested  in  the  roads, 
it  follows,  from  the  figures  given  in  the  statistician's  report,  that 
the  ownership  of  $1,932,234,128,  or  23.77  per  cent,  of  the  total  rail- 
way capital,  insures  complete  direction  over  $8,129,787,731  of  rail- 


CONTROVERSIES.  87 

Cumulative  voting  should  be  allowed.  By  cumu- 
lative voting  a  man  with  one  hundred  shares  of  stock 
may  cast  five  hundred  votes  for  one  director  instead 
of  one  hundred  votes  for  each  of  five  directors,  as 
under  the  old  system.  Cumulative  voting  gives  the 
minority  of  stockholders  a  representative  in  the 
board  of  directors.  Their  representative,  as  a  di- 
rector, will  know  the  innermost  secrets  of  the  corpo- 
ration, and  will  be  able  to  expose  and  prevent  many 
of  the  frauds  that  are  perpetrated  by  a  board  which 
represents  the  majority  interest  alone.  Nine  of  the 
States  have  provided  for  cumulative  voting  in  their 
fundamental  law  —  the  constitutions  themselves. 
The  system  is  just,  fair,  and  satisfactory  in  its  re- 
sults. It  should  be  and  will  be  the  law  in  all  of 
the  States. 

Stockholders  should  be  allowed  to  remove  a  direc- 
tor whenever  they  see  fit.  As  the  law  now  stands, 
a  director,  once  in,  remains  in  his  office  for  a  year 
and  cannot  be  removed.  Even  though  he  may  sell 
his  stock,  become  interested  in  a  competing  concern, 
be  reckless  in  administration,  or  utterly  neglectful  of 
his  duties,  nevertheless  neither  the  courts  nor  the 
stockholders  can  remove  him.  He  may  even  rob 
the  corporation,  and  yet,  though  the  courts  may 
attack  and  stop  the  robbery,  they  cannot  remove 
him.  He  is  a  fixture  for  a  year.  Such  a  rule  of  law 
is   unjust,  and  has  led  to   changes  by  statute.     In 

way  capital,  t)r  136.8S3.53  miles  of  line.  Massachusetts  law  forbids 
the  bonding  of  a  ruad  to  an  amount  exceeding  the  total  of  paid-up 
share  caj)ital,  and  this  regulation  is  being  intr'xluced  by  other 
States." 


88  THE   CORPORATION   PROBLEM. 

national  banks  the  acts  of  Congress  provide  that 
the  stockholders  may  remove  a  director  at  any  time, 
and  some  of  the  States  are  following  this  example. 
It  is  a  reform  that  is  to  be  commended.  It  will 
render  the  directors  more  responsible  to  stock- 
holders, more  in  harmony  with  their  wishes  and 
interests,  and  will  make  directors  more  cautious, 
conservative,  and  honest. 

Stockholders  should  be  given  greater  rights  to 
examine  the  books  of  the  corporation.  At  common 
law  this  right  exists  theoretically,  but  practically  the 
courts  have  taken  it  away.  When  it  is  considered  that 
a  corporation  is  only  a  highly  developed  partnership, 
and  that  a  partner  always  has  a  right  to  examine  the 
partnership  books,  the  natural  rights  of  a  stock- 
holder become  more  clear.  He  should  be  allowed 
to  know  the  condition,  contracts,  and  plans  of  his 
corporation.  Most  of  the  States  have  provided  by 
statute  that  the  stockholder  shall  have  this  right. 
In  England  another  plan  is  adopted,  and  it  is  pro- 
vided by  act  of  Parliament  that  a  minority  of  the 
stockholders,  representing  a  twentieth  or  a  tenth  of 
the  stock,  may  demand  a  judicial  investigation  of  the 
affairs  of  the  corporation  at  any  time  when  they 
have  reason  to  suspect  fraud  or  mismanagement. 

Closely  connected  with  this  reform  is  the  question 
of  requiring  frequent  and  detailed  reports  from 
directors.  The  common  law  does  not  require  any 
report  at  all  to  be  made.  Statutes,  however,  gen- 
erally provide  for  an  annual  report.  But  the  ten- 
dency of  the  times  is  to  go  farther  than  this  and 
to  require  directors  and  officers  to  make  reports  at 


CONTROVERSIES.  89 

frequent  intervals,  and  whenever  demanded  by  a 
stockholder  or  a  certain  proportion  of  the  stock- 
holders.* 


'Mr.  Hitchcock,  speaking  of  this  subject  has  said:  "Every 
private  corporation  should  be  required  to  file,  not  only  vtith  the 
Secretary  of  State,  but  in  some  convenient  public  office  at  its  place 
of  business,  at  least  once  in  three  months,  a  particular  account, 
on  oath,  of  its  assets  and  liabilities,  such  as  will  enable  creditors 
and  others  interested,  without  application  to  its  officers,  to  learn 
its  true  position.  Railroad  and  other  corporations  affecting  public 
interest  should  also  be  compelled  to  publish,  monthly,  such  state- 
ments so  that  the  public  should  at  least  have  the  opportunity  of 
forming  their  own  judgment  as  to  the  value  of  the  stocks,  which,  in 
the  absence  of  such  information,  are  the  playthings  of  speculators, 
and  too  often  the  ruin  of  bona  fide  investors." 

Professor  Warner  says:  "The  advantages  of  business  secrecy  to 
the  individual  business  man  who  practises  it  are  abundantly  manifest ; 
but  its  advantages  to  the  public  at  large,  while  also  manifest,  are 
countervailed  by  very  serious  disadvantages.  Experience  seems  to 
have  demonstrated,  quite  conclusively,  that  a  being  at  once  so  vulner- 
able and  so  powerful  as  a  corporation  cannot  afford  to  keep  its  affairs 
entirely  to  itself  ;  and  if  it  could  afford  to  do  so,  the  public  cannot 
afford  to  let  it.  There  is  said  to  be  a  strong  tendency  toward 
'  socialism '  in  this  wresting  of  business  secrets  from  the  great 
managers  of  the  world's  industries,  and  bringing  the  most  private  of 
business  transactions  to  the  bar  of  public  opinion.  Many  will  no 
doubt  answer  that  '  the  charge  is  true,  and  we  glory  in  its  truth.' 
Many  more  will  be  inclined  to  say,  with  the  present  writer,  that, 
while  this  objection  should  be  given  its  due  force,  it  has  not  nearly 
force  enough  to  overrule  the  strong  necessities  of  the  case.  The 
chief  danger  that  legitimate  enterprises  have  to  fear  from  complete 
publicity  is  that  of  over-taxation.  The  wealth  of  the  corporations 
lying  fully  exposed  to  public  view,  it  is  so  easy  for  the  politician  to 
fill  the  public  coffers  from  that  source,  that  we  already  find  certain 
classes  of  corporations  driven  out  of  certain  States  by  excessive  taxa- 
tion. But  it  may  be  doubted  whether  taxation  is  as  likely  to  be 
excessive  when  the  state  of  a  company's  accounts  is  definitely  known, 
as  when  the  politician  and  his  constituents  are  free  to  draw  upon  their 


90  THE   CORPORATION   PROBLEM. 

The  incorporators  of  a  company  should  be  allowed 
to  insert  certain  provisions,  restrictions,  and  regula- 
tions in  their  articles  of  association — their  charter. 
In  New  Jersey,  and  under  the  National  Banking 
Act,  such  special  provisions  may  thus  be  made  part 
of  the  charter  of  the  company.  Under  the  General 
Incorporating  Act  of  New  Jersey,  the  certificate  of 
incorporation  "  may  contain  any  limitation  upon  the 
powers  of  the  corporation,  the  directors,  and  the 
stockholders,  that  the  parties  signing  the  same  desire ; 
provided  such  limitation  does  not  attempt  to  exempt 
the  corporation,  the  directors,  or  the  stockholders 
from  the  performance  of  any  duty  imposed  by  law."  ' 
So  also  the  National  Banking  Act  provides  that  the 
articles  of  association  may  contain  any  *'  provisions, 
not  inconsistent  with  law,  which  the  association 
may  see  fit  to  adopt  for  the  regulation  of  its  business 
and  the  conduct  of  its  affairs." " 

Again,  as  the  general  law  exists  to-day,  the  direc- 
tors exercise  all  of  the  essential  powers  of  a  corpora- 
tion, and  the  stockholders  none.  The  stockholders 
elect  the  directors,  enact  by-laws,  and  perform  a  few 
other  minor  functions,  but  they  cannot  order  a  con- 
tract to  be  made,  nor  can  they  give  orders  to  the 
directors.  The  tendency  of  the  times  is  to  enlarge 
the  powers  of  the  stockholders  and  to  restrict  those 
of    the   directors.      Statutes   for   that   purpose    are 

imaginations  for  the  amount  of  wealth  in  the  corporate  coffers.  In 
other  words,  it  seems  probable  that  in  this  country,  as  yet,  we  have 
less  to  fear  from  wilful  injustice  than  from  mutual  misunderstandings, 
begotten  of  secrecy  on  the  one  hand,  and  suspicion  on  the  other." 

^  N.  J.  Revision,  p.  i8o. 

''R.  S.,§5i33. 


CONTROVERSIES.  9 1 

being  enacted  by  the  legislatures  of  the  various 
States.  These  changes,  however,  might  better  be 
left  to  the  discretion  of  the  stockholders  themselves, 
and  permission  be  given  to  them  to  insert  such 
restrictions  as  they  desire  in  their  charter.  Under 
such  a  freedom,  corporation  law  would  be  given  an 
elasticity  which  it  does  not  now  possess.  By  the  in- 
serting of  special  provisions,  the  minority  may  be  pro- 
tected, the  powers  of  the  directors  limited,  corporate 
debts  restricted,  officers  made  subject  to  removal, 
the  giving  of  mortgages  regulated,  reports  required, 
the  right  of  inspecting  the  books  conferred  and 
enforced,  cumulative  voting  provided  for,  and  the 
important  lines  of  policy  peculiar  to  each  corpora- 
tion may  be  laid  out  and  secured  from  variation  and 
diversion.  Incorporators  would  thus  be  allowed  to 
legislate  for  themselves  without  the  intervention  of 
State  legislatures.  With  a  definite  knowledge  of 
what  their  interests  require,  the  incorporators  and 
investors  would  protect  themselves  more  fully  than 
they  could  be  protected  by  others.  They  could 
frame  their  charter  as  they  wished,  and  their  judg- 
ment and  ingenuity  would  do  much  towards  pre- 
venting frauds  on  stockholders,  creditors,  and  the 
general  public. 

Fraudulent  prospectuses  and  fraudulent  contracts 
between  corporations  and  their  promoters  have 
become  another  of  the  great  corporation  abuses. 
In  England,  this  evil  became  so  great  that  in  1867 
a  statute  was  passed  requiring  a  public  registry  of 
all  contracts  whereby  stock  was  issued  by  a  corpora- 
tion in  payment  for  property.     In  these  latter  days, 


92  THE   CORPORATION   PROBLEM. 

corporate  promoters  do  not  hesitate  to  send  out 
prospectuses  and  statements  that  the  capital  stock 
is  all  paid  up  and  that  the  enterprise  is  fully  afloat, 
when,  in  fact,  the  capital  stock  has  been  paid  in,  or 
is  to  be  paid  in,  only  by  worthless  patents  or  prop- 
erty purchased  at  a  gross  over-valuation.  The 
money  invested  by  the  simple  and  the  unwary  is 
irretrievably  lost.  This  evil  is  great  and  increasing, 
and  the  number  of  ''  bubbles "  which  are  floated 
every  year,  and  which  are  insolvent  from  the  very 
start,  is  something  appalling.^ 

Professor  Warner  says  on  this  subject: 

"  Men  organize  companies,  at  times,  for  the  sole  purpose  of  un- 
loading upon  them  an  unprofitable  business.  Let  the  experience  of 
Eastern  capitalists  with  Western  mining  stocks  be  put  in  evidence, 
and  no  one  will  question  this  statement.     Mining  companies  with  a 

^  The  New  York  Record  and  Guide,  November  23,  i88g,  says  : 
Parliament  "has  distrusted  the  limited  liability  principle  ever 
since  the  Bubble  craze  in  1720,  when  companies  were  formed  for  all 
possible  and  impossible  purposes,  from  the  invention  of  perpetual 
motion  to  the  melting  down  of  sawdust  and  the  manufacture  of 
knotless  boards  from  the  product.  No  general  law  for  the  incor- 
poration of  limited  liability  companies  was  passed  in  England  till 
1855,  though  a  similar  law  had  been  passed  by  the  State  of  New 
York  as  early  as  181 1, 

"From  1,500  to  2,000  joint  stock  companies  are  registered  each 
year  in  England,  of  which  about  50  per  cent,  die  at  birth — a  singu- 
lar commentary  on  the  legal  doctrine  that  corporations  are  immortal. 
Out  of  1,440  companies  registered  in  London,  with  a  nominal 
capital  of  ;^  143,000,000,  no  less  than  430  died  at  birth,  while  360 
were  wound  up  within  two  years.  Out  of  26,000  companies  regis- 
tered during  twenty-nine  years  the  proportion  of  unsuccessful  ones 
was  about  64  per  cent.  .  .  .  The  same  expounder  of  statistics 
concluded  that  ;i^ 3 2 8, 000, 000  of  capital  had  been  wiped  out  so  far  as 
the  bona  fide  investing  public  was  concerned." 


CONTROVERSIES.  93 

nominal  capital  of  $50,000,000  that  have  never  declared  a  dividend 
are  not  uncommon,  and  very  frequently  the  stock  of  mammoth  com- 
panies sells  at  one  cent  on  the  dollar  for  some  time  before  it  becomes 
worthless.  But  the  experience  in  mining  is  only  an  extreme  case  of 
what  takes  place  in  many  departments  of  industry. 

"In   England,  turning  thither  solely  because  the  facts  have  there 
been  made  accessible  and  have  not  in  this  country,  it  is  found  tliat 
certain   men  make  a  business  of  acting  as  '  promoters.'     They  are 
skilled  in  the  writing  of  prospectuses  of  companies,  and  know  all  tlie 
arts  by  which  stock  can  be  sold.     They  devote  their  energies  espe- 
cially to  small  companies  and  small  investors.     For   a  time  their 
activity  was  turned  largely  to  organizing  '  single  ship  companies,' 
the  shares  of  which  could  be  placed  among  country  parsons,  serving- 
women,  and  other  classes  of  small   investors   likely  to   know  very 
little  about  commerce,  and  therefore  likely  to  believe  anything  a 
well-printed    'prospectus'   might  tell   them.     Many  of  these  small 
companies   never  went   so  far  as  to  build  even  a  single  ship,   but 
enough  ships  were  built  by  them  to  materially  increase  the  number  of 
*  ocean  tramps,'  and  to  call  for  much  adverse  criticism  from  the  com- 
mittee appointed  *  to  investigate  the  loss  of  life  at  sea.'     The   '  com- 
mission appointed  to  inquire  into  the  depression  of  trade  '  also  had 
much  to  say  of  the  influence  of  the  creation  of  such  great  numbers 
of  limited  liability  companies,  of  the  direct  loss  to  investors,  and  of 
the  general  demoralization  of  trade  resulting  from  it.     In  fact,  many 
English  investigators  have  laid  great  emphasis  on  the  idea  that  over- 
speculation  is  due  largely  to  the  formation  of  joint-stock  companies 
that  have  no  real  excuse  for  existence,  except  the  furtherance  of  the 
personal  aims  of  the  '  promoters.'     It  is  a  little  curious  that,  among 
the  three  hundred  real  or  alleged  causes  of  '  hard  times,'  brought  to 
the  attention  of  our  National  Bureau  of  Labor,  the  reckless  creation 
of  limited  liability  concerns  was  not  mentioned.     In   18S6  a  writer 
estimated  that  there  were  afloat  in  the  English  stock  market  fully 
two  billion  pounds  of  speculative  securities,  of  which  at  least  a  fourth 
were  mere  gambling  counters.     It  is  to  such  a  state  of  things  that  a 
recent  law  review  attributes  the  fact  that  real  investors  now  shun  the 
stock  exchange,  and  speculative  operators  are  compelled  to  live  on 
the  plan   of  '  dog-eat -dog.'     .     .     .     None  of  the  leading  commer- 
cial countries  .seem  to  be  quite  satisfied  with  the  attempts  they  have 
made  to  remedy  such  evils  as  these.     Germany  allows  definite  pay- 
ment from  the  corporation  funds  for  the  trouble  and  expense  properly 


94  THE   CORPORATION   PROBLEM. 

incurred  by  the  men  who  organize  a  joint-stock  company,  but  guards 
very  carefully  against  the  illicit  gains  too  often  made  by  '  promoters.' 
The  provisions  for  registering  new  companies  are  especially  stringent 
in  all  cases  where  a  private  business  or  factory  is  to  be  sold  to  a  cor- 
poration organized  to  buy  and  manage  it.  The  fullest  possible  pub- 
licity is  sought  regarding  all  the  initial  acts  of  a  new  company,  and 
some  matters  where  the  first  decision  must  be  final  are  reserved  for  a 
second  meeting  of  the  stockholders.  Shares  may  run  either  to 
'  bearer '  or  to  a  particular  name.  The  latter  cannot  be  issued  for  a 
less  amount  than  fifty  thaler  per  share,  and  the  former  for  less  than 
one  hundred  thaler  per  share.  By  forbidding  the  issue  of  shares  of 
less  amount,  it  is  hoped  to  make  investors  consider  more  carefully 
the  subject  of  investing,  and  to  prevent  the  floating  of  small  shares 
in  worthless  companies,  among  the  class  of  very  small  investors  who 
are  most  likely  to  be  swindled." 

The  tendency  of  the  times  is  to  impose  heavy 
penalties  on  such  acts,  and  the  penalty  should  be 
that,  if  the  statements  of  prospectus  or  contract 
whereby  the  stock  is  issued  be  false,  then  the  di- 
rectors shall  be  liable  for  all  debts. 

In  England  Parliament  has  recently  enacted  a 
law  creating  such  a  liability  oh  the  part  of  cor- 
porate officers,  organizers,  and  promoters.^  This 
bill  met  with  great  opposition  in  that  country.  Its 
enactment  was  due  to  a  widespread  conviction  that 
the  existing  law  was  vague  and  too  difficult  of 
enforcement,  as  regards  the  liability  of  directors  and 
promoters  for  fraudulent  prospectuses.  Both  in 
England  and  America  this  evil  and  the  remedy 
therefor  constitute  one  of  the  questions  of  the  day.'* 

'  See  Chapter  64,  Laws  of  1890. 

^  Professor  Richard  T,  Ely,  in  Harper  s  Magazine,  J^^ly,  i887)  P- 
265,  says  : 

"  Men  who  wish  to  form  a  corporation  should  be  compelled  to 
issue  a  prospectus,   signed  with  their  names,  giving  a  full  and  com- 


CONTROVERSIES.  95 

Another  abuse  that  often  comes  to  light  is  the 
consoUdation,  lease,  or  »ale  of  railroads  without  any 
protection  of  the  rights  of  minority  stockholders. 
Generally  these  consolidations,  leases,  and  sales  are 
allowed  upon  a  majority  or  two-thirds  vote  of  the 
stockholders,  and  this  majority  or  two  thirds  are 
interested  on  both  sides  of  the  contract.  The  mi- 
nority are  compelled  to  acquiesce.  Great  frauds  are 
perpetrated  under  this  system.  In  one  case  in  Con- 
necticut where  a  charter  allowed  a  lease  upon  a  three- 
fourths  vote  of  the  stockholders,  the  lease  was  upheld, 
although  the  rental  from  the  lease  was  only  enough 
to  pay  dividends  on  the  preferred  stock,  leaving 
nothing  whatever  for  the  common  stockholders.  It 
may  be  remarked  that  when  such  acts  are  upheld  by 
the  law  it  is  time  for  the  legislature  to  interfere. 
Several  of  the  States  now  compel  the  parties  in  con- 
trol to  buy  out  the  dissenting  minority  in  such  cases 
at  an  appraised  valuation  of  the  stock.  This  is  the 
law  in  Pennsylvania  and  New  Jersey  and  under  the 
National  Banking  Act.  It  enables  great  consolida- 
tions and  reorganizations  to  be  carried  out,  and  at 
the  same  time  protects  the  property  of  dissenting 
stockholders. 

Finally,  boards  of  directors  should,  by  statute,  be 
required  to   meet  more  frequently,  and  they  should 

plete  statement  about  the  business  to  be  pursued,  the  capital  to  be 
invested,  any  existing  property  to  be  taken  in  lieu  of  money,  any 
property  to  be  acquired  of  promoters,  with  its  histor)'  for  the  preced- 
ing two  or  three  years.  This  prospectus  should  be  made  a  matter  of 
public  record,  and  any  dishonest  statement  should  be  regarded  as 
fraud." 


96  THE   CORPORATION   PROBLEM. 

be  well  paid  for  their  services,  instead  of  serving 
without  pay  as  they  usually  do  now.  They  should 
be  required  to  scrutinize  and  audit  more  closely,  and 
a  greater  responsibility  for  results  should  be  placed 
upon  them,  and  less  upon  the  active  agents  of  the 
company.  Such  is  the  practice  in  England  and  with 
many  of  the  larger  companies  in  America.  The  rule 
has  worked  well  with  some  of  the  great  insurance 
companies,  and  with  others  of  marked  success.  It 
should  be  made  the  rule  of  all  great  corporations. 

There  are  other  changes  in  the  law  which  are 
coming — and  coming  soon.  Guaranties  of  the  stock 
or  bonds  of  one  railroad  by  another  railroad  should 
be  allowed  only  after  a  vote  by  the  stockholders,  in- 
stead of  by  the  directors  alone.  Stockholders  should 
have  some  voice  in  determining  dividends,  instead 
of  the  decision  being  entirely  in  the  hands  of  the 
directors,  as  at  present  is  the  law.  Branch  railroads 
and  extensions  should  not  be  built  except  upon  con- 
sent of  a  majority  of  the  stockholders,  and,  in  gen- 
eral, a  remodelling  of  the  law  so  far  as  the  protection 
of  stockholders  and  creditors  is  concerned,  is  imper- 
atively demanded.  The  ideal  code  of  corporation 
law  is  yet  to  be  written. 

MUNICIPAL    AID    TO    RAILROADS. 

The  American  people  are  beginning  to  realize  that 
municipal  aid  to  railroad  corporations  is  a  mistake. 
It  is  a  mistake  because  the  municipal  debt  is  a  griev- 
ous mortgage  on  present  and  future  generations, 
and  because  railroads  will  be  built  without  it.  There 
was  a  time  when  railroads  were  built  very  largely 


CONTROVERSIES.  97 

from  the  proceeds  of  municipal  bonds,  but  those  days 
are  past.  The  protest  and  warning  of  some  of  the 
leading  thinkers  and  jurists  of  America  have  con- 
vinced the  people  of  the  injustice,  improvidence, 
and  needlessness  of  this  municipal  aid,  and  the 
strong  tendency  of  the  times  is  against  allowing 
cities,  counties,  and  towns  to  bond  themselves  in 
order  to  make  rich  gifts  to  projected  railroads. 

The  lament  of  Judge  Dillon  on  this  subject  re- 
minds one  of  the  thoughts  of  Macaulay's  New  Zea- 
lander  overlooking  the  ruins  of  London  from  the 
London  Bridge.  In  his  great  work  on  '*  Municipal 
Corporations,"  the  author  says  : 

"  If  it  be  allowable  to  judge  of  a  legal  principle  by  its  fruits,  the 
dissenting  and  minority  judges  on  this  question  will  find  much  to 
confirm  the  conviction  that  their  views  were  sound.  But  it  is  useless 
to  fight  that  battle  over  again  ;  it  has  been  fought  and  lost.  All  that 
is  left  is  the  contemplation  and  contrast  of  what  might  have  been 
and  what  is."  ^ 

'Dillon  on  "Municipal  Corporations,"  3d  ed.,  p.  50S,  n.  See 
also  Cooley's  "  Constitutional  Lim.,"  5th ed.,  265,  etc. 

'*  The  cities,  towns,  and  States,  have  not  been  alone  in  granting  aid 
to  railroads.  The  federal  government  some  twenty-five  years  ago 
commenced  making  grants  of  land  to  trunk  lines  of  railroad  to  be 
constructed  to  the  Pacific  Coast.  The  total  grant  made  to  the  Union 
Pacific  Railway  was  13,000,100  acres  ;  to  the  Kansas  Pacific,  6,000- 
000;  to  the  Central  Pacific,  12,100,100;  to  the  Northern  Pacific, 
47,000.000  :  to  the  Atlantic  and  Pacific,  42,000,000  ;  to  the  Southern 
Pacific,  9,520,000.  Great  subsidies  of  money  exceeding  $60,000,000 
were  also  granted  by  Congress  to  the  first  transcontinental  lines. 
The  land-grants  usually  consisted  of  alternate  sections  ;  in  the  earlier 
cases,  of  five  to  the  mile  along  the  line." 

See  Brj'ce's  ".American  Commonwealth,"  vol.  ii.,  p.  507,  n. 

I'he  "Encyclopaedia  Britannica,"  p.  254,  states  that  200,000,000 
acres  of  land  and  $13,060,000  were  given  at  one  time  and  another  by 
7 


98  THE   CORPORATION   PROBLEM. 

The  Supreme  Court  of  the  United  States,  in  order 
to  preserve  the  good  name  and  financial  credit  of 
municipal  bonds  and  American  securities  generally, 
held,  and  properly  held,  that  the  bonds  issued  by 
municipalities  to  aid  railroads  should  not  be  re- 
pudiated, but  must  be  paid.  Under  the  protection 
of  these  decisions  railroad  promoters  continued  to 
build  railroads  by  the  aid  of  municipal  bonds,  and  if 
the  bonds  were  not  forthcoming  from  one  town,  the 
railroad  avoided  that  town  and  built  to  another  and 
rival  town. 

' '  A  railroad  company  approaches  a  small  town  as  a  highwayman 
approaches  his  victim.  The  threat  '  If  you  do  not  accede  to  our 
terms  we  will  leave  your  town  two  or  three  miles  to  one  side,'  is  as 
efficacious  as  the  '  Stand  and  deliver '  when  backed  by  a  cocked 
pistol.  For  the  threat  of  the  railroad  company  is  not  merely  to 
deprive  the  town  of  the  benefits  which  the  railroad  might  give  :  it  is 
to  put  it  in  a  far  worse  position  than  if  no  railroad  had  been  built. 
Or  if,  where  there  is  water  communication,  an  opposition  boat  is  put 
on  :  rates  are  reduced  until  she  is  forced  off,  and  then  the  public  are 
compelled  to  pay  the  cost  of  the  operation."  ^ 

The  burden  of  municipal  debt  and  the  exactions 
of  the  railroads  at  length  became  unbearable.  Some 
remedy  was  imperative.  Moreover,  it  had  become 
clear  that  the  remedy  must  prevent  the  issue  of  the 
bonds,  rather  than  the  repudiation  of  the  bonds  after 
they  had  passed  into  the  hands  of  bona  fide  in- 
vestors. 


Congress  to  the  railroads  between  the  Missouri  River  and  the  Pacific 
Ocean. 

Adams  on  "Public  Debts,"  p.  356,  note,  says  that  previous  to 
1880  Congress  had  granted  215,000,000  acres  of  land  to  railroads  and 
canals,  of  which  titles  were  secured  to  150,000,000  acres. 

'  George  on  "  Progress  and  Poverty,"  bk.  iii.,  ch.  iv. 


CONTROVERSIES.  99 

It  was  found  that  only  a  constitutional  prohibition 
could  cure  the  evil.  The  legislature  could  not  be 
relied  upon.  Accordingly,  in  most  of  the  States, 
these  constitutional  prohibitions  have  been  enacted. 
And  in  this  instance  the  provisions  of  a  constitution 
have  accomplished  their  purpose.  The  ingenuity 
even  of  railroads  and  corporation  lawyers  have  been 
unable  to  circumvent  this  remedy.  Municipal  aid 
to  railroads  in  States  where  these  constitutional  pro- 
hibitions exist  is  no  longer  attempted.  Voluntary 
contributions  may  be  obtained  from  the  citizens, 
but  municipal  bonds — bonds  that  must  be  paid  by 
the  city  or  county — can  no  longer  be  issued  in  those 
States.  The  problem  has  been  solved  conclusively 
and  satisfactorily. 

LIMITED    LIABILITY    OF    STOCKHOLDERS. 

The  stockholders'  exemption  from  liability  for  the 
corporate  debts  is  the  essential  feature  of  modern 
corporations.  If  this  limited  liability  were  taken 
away,  corporations  would  fall  away  with  it.  It  is 
the  limitation  of  possible  loss  that  renders  the 
corporation  a  favorite  mode  of  doing  business. 

It  is  a  question,  however,  whether  or  not  this 
liability  should  be  limited  to  the  extent  that  it  is  at 
present.  Under  the  general  law  a  stockholder  is  no 
longer  liable  for  the  debts  of  the  corporation  after 
his  stock  has  once  been  fully  paid  up.  In  some 
classes  of  corporations  this  limited  liability  has  been 
found  dangerous  and  unjust.  It  is  now  generally 
conceded  that  stockholders  in  banks  should  be  liable 
doubly  on  their  stock,  once  on  the  subscription,  and 


lOO  THE    CORPORATION    PROBLEM. 

aeain  in  case  the  bank  becomes  insolvent.  Such  is 
the  liabihty  of  stockholders  in  national  banks  and 
in  the  banks  of  most  of  the  States.  It  has  seemed 
reasonable  that  the  unprotected  depositors,  most  of 
whom  receive  no  interest  on  their  deposits,  should 
not  bear  the  losses  of  an  insolvent  bank,  but  that 
the  stockholders,  who  have  had  the  benefit  of  those 
deposits,  should  take  the  risks  of  the  business. 

A  desire  also  to  protect  those  who  most  need 
protection  against  insolvent  corporations  has  caused 
many  of  the  States  to  provide  that  stockholders 
shall  be  hable  absolutely  for  all  debts  due  from  the 
corporation  to  its  laborers.  Such  is  the  constitu- 
tional enactment  in  Michigan  as  regards  all  corpora-- 
tions,  and  such  is  the  statutory  law  of  New  York  for 
the  railroads  within  its  borders. 

But  with  these  exceptions  the  attempts  to  make 
stockholders  liable  for  the  debts  of  the  corporation 
have  been  failures.  The  State  of  Ohio,  by  consti- 
tutional provision,  renders  all  stockholders  in  all 
corporations  liable  doubly  on  their  stock,  but  the 
liability  is  one  that  is  rarely  enforced.  In  Cali- 
fornia stockholders  are  liable  for  all  debts  as  in  a 
partnership.  In  New  York  stockholders  in  manu- 
facturing and  business  corporations  are  liable  doubly 
until  a  certain  certificate  is  filed. 

Companies  and  investors  avoid  the  States  where 
stockholders  are  liable  for  debts,  and  betake  them- 
selves for  incorporation  to  those  States  whose  laws 
are  more  liberal.  It  is  probable  that  adverse  and 
restrictive  incorporation  laws  drive  out  more  capital 
in  a  year  than  the  amount  of  money  collected  under 


CONTROVERSIES.  lOI 

the  restrictions  amounts  to  in  five  generations. 
Liberality  in  corporation  laws  is  necessary,  if  corpo- 
rations are  to  be  kept  at  home,  and  if  a  State  is  harsh 
and  restrictive  in  its  statutes,  it  pays  the  penalty  in 
seeing  its  citizens  apply  to  more  favorable  States  for 
the  charters  of  their  corporations.  The  past  twenty 
year.s  have  demonstrated  that  an  additional  liability 
t)f  stockholders  drives  capital  from  the  State,  is  en- 
forced with  difficulty  and  generally  not  at  all,  is  fatal 
to  the  extension  and  growth  of  corporations  as  a 
mode  of  doing  business,  and  is  dreaded  by  investors 
far  beyond  its  value  to  the  public. 

And  the  same  may  be  said  of  penalties  and  liabili- 
ties imposed  upon  directors.  Such  statutes  as  these 
are  filled  with  pitfalls,  and  lead  to  great  hardships. 
They  rarely  result  in  justice  being  done,  but  are  pro- 
lific of  lawsuits  and  losses  by  reason  of  mistakes 
and  accidental  ov^ersights.  The  corporation  of  the 
future  will  be  without  them,  except  in  cases  of  wil- 
ful neglect,  fraud,  or  violation  of  plain  duty. ' 

'  Professor  Warner  advocates  a  greater  liability  of  directors.  He 
says  : 

"In  this  countr)'  the  principle  of  limited  liability  is  almost  in- 
variably the  same  for  the  director  as  for  an  ordinary  stockholder, 
though  the  director  is  personally  liable  for  all  illegal  or  unauthorized 
acts.  There  has  been  a  great  deal  of  agitation  of  late  for  the  intro- 
duction of  the  French  plan  of  protecting  ordinary  stockholders  by 
the  grant  of  limited  liability,  but  leaving  the  directors  liable  for  the 
corporate  debts  to  the  full  amount  of  their  respective  fortunes.  The 
experience  of  France  with  these  societies  en  commandite  has  proved 
that  responsible  men  can  be  found  to  manage  any  legitimate  enter- 
prise under  this  j)lan.  A  recent  English  act  permits  the  formation  of 
sueh  companies  in  England,  but  the  companies  decline  to  adopt  this 
principle  under  mere  permissive  legislation.     To  make  this  form  of 


I02  THE   CORPORATION   PROBLEM. 

TAXATION    AND    EXEMPTION    FROM    TAXATION. 

How  to  tax  corporations,  and  how  to  tax  them 
fully,  yet  fairly,  is  one  of  the  most  perplexing 
problems  of  the  times.  For  fifty  years  experiments 
have  been  going  on,  and  no  satisfactory  conclusion 
has  yet  been  reached.  Each  State  still  has  its  pe- 
culiar mode  of  taxing  corporations,  yet  none  seems 
content  with  the  system  which  it  has. 

The  popular  idea  is  that  corporations  cannot  be 
taxed  too  heavily,  nor  too  often,  nor  in  too  many 
ways.     It  has  been  truly  said  that  a  sort  of  Donny- 
brook  habit  of  taxing  every  corporation  that  shows 
itself  seems  to  pervade  all  State  legislatures.     The 
result  is  that  corporations  dodge  around  among  the 
States,   and   obtain    their    charters    in    those   States 
where  taxes  are  lightest.     New  York  State  in   1886 
enacted  what  is  called  the  "  Vedder  Act,"  requiring 
every  company  to  pay  into  the  State  Treasury  a  sum 
of  money  equal  to  one  eighth  of  one  per  cent,  of 
its  capital  stock  before  it  could  become  incorporated 
in  that  State.    The  result  has  been  that  comparatively 
few  manufacturing  and  business  companies  incorpo- 
rate in  New  York.     This  tax  has  driven  them  into 
other  States.     They  go  to  New  Jersey,  West  Vir- 
ginia, Kentucky,  Connecticut,  or  Maine.     Pennsyl- 
vania and  Ohio  have  taxation  laws  similar  to  those 
of  New  York.    And  the  present  tendencies  of  all  the 
States  are  in  the  same  direction,  regardless  of  the 

organization  mandatory  upon  certain  selected  classes  of  our  corpora- 
tions is  an  experiment  that  ought  to  be  tried,  and  is  much  better  than 
going  back  to  the  old  plan  of  unlimited  liability  for  stockholders,  as 
California  has  done." 


CONTROVERSIES.  IO3 

fact  that  excessive  taxation  of  corporations  is  unjust, 
drives  away  capital,  is  no  preventive  of  stock  water- 
ing, is  not  based  on  protection  to  property,  and  is 
an  incubus  and  partial  veto  upon  the  only  mode  of 
doing  business  on  a  scale  equal  to  the  requirements 
of  modern  times.  An  incorporation  tax  is  worse 
than  an  income  tax,  because  it  taxes  the  corporation 
before  its  income  has  commenced.' 

Moreover,  unjust  taxes  on  corporations  do  not 
end  with  the  incorporation  fee.  In  many  States  a 
heavy  tax  is  levied  annually  both  on  the  capital 
stock  and  on  the  personal  property  of  corporations. 
The  same  property  is  taxed  twice.  Indeed,  there 
are  instances  worse  than  this.  In  Connecticut  in 
1868  there  was  a  method  of  taxing  corporations  by 
which  the  same  property  was  taxed  five  separate 
times,  and  the  courts  upheld  the  taxation.     Corpo- 

'  Vet  during  the  past  fiscal  year  (1890)  New  York  received  from 
incorporation  fees  $220,719.94,  an  increase  of  $21,737.60  over  the 
previous  year. 

On  April  6,  i8gi,  President  Michael  Coleman  of  the  Tax  Depart- 
ment of  New  Vork  City,  one  of  the  most  accomplished  and  ex- 
perienced Tax  Commissioners  that  New  Vork  ever  had,  testified, 
before  the  Senate  Committee,  that  from  Januar\',  1890.  to  January, 
1S91,  companies  with  $320,000,000  of  capital  had  been  incorporated 
in  two  counties  alone  in  New  Jersey,  although  doing  their  business 
and  having  their  offices  in  New  Vork  City  ;  that  of  these  from  fifteen 
to  twenty  per  cent,  had  previously  been  incorporated  under  the  laws 
of  New  Vork  ;  and  that  of  personal  property  to  the  amount  of 
$1,727,318,188  assessed  in  New  Vork  City,  $1,400,000  had  been 
stricken  off  as  not  subject  to  taxation  because  it  was  incorporated 
out  of  the  State.  Mr.  Coleman  recommended  that  foreign  corpora- 
tions be  taxed  on  their  gross  receipts,  that  the  tax  on  New  Vork 
corporations  be  largely  reduced,  and  that  the  Philadelphia  system  of 
taxing  corporations  be  adopted. 


104  THE   CORPORATION   PROBLEM. 

rations  were  clearly  not  popular  in  Connecticut  at 
that  early  day,  except  for  taxation  purposes.  The 
fact  is  that  there  is  no  justification  for  a  double  tax 
on  a  manufacturing  or  business  corporation.  This 
class  of  corporations  differs  very  little  from  partner- 
ships and  should  be  treated  with  equal  favor. 

The  effort  to  devise  a  proper  and  fair  method  of 
taxing  corporations  has  been   prolific   of  litigation 
and  experimental  legislation.     It   is  still  far  from  a 
clear  conclusion.     Taxes  may  be  levied  on  the  fran- 
chise, or  capital  stock,  or  tangible  property,  or  shares 
of  stock  of  a  corporation.     A  tax  on  the  shares  of 
stock   is  invariably  unjust.     It   amounts  to   double 
taxation,  inasmuch   as   either  the   franchise,  or  the 
capital  stock,  or  the  tangible  property  of  the  corpo- 
ration   has   already   been    taxed    once.      The    New 
York   mode    of    taxing   corporations   seems   to   be 
that  which  is  being  adopted  by  many  of  the  States. 
The   tax  is  levied    on    the   par  value   of   the   cap- 
ital  stock    and    the   percentage    of   the   tax   varies 
according  to  the  percentage  of  dividends  that  have 
been  declared.     If  the  dividends  have  been  less  than 
a  certain  amount  then  a  fixed  tax  is  levied  on  the 
market  value  of  the  whole  capital  stock.     Even  this 
mode  of  taxation,  however,  has  been  found  difficult 
of  application. 

There  are  corporations,  however,  which  should  be 
taxed  in  divers  ways  and  heavily.  The  railroad, 
gas,  telegraph,  telephone,  electric  light  and  water- 
works corporations — the  corporations  which  are  nat- 
ural monopolies  and  which  have  been  given  peculiar 
franchises, — these  are  fit  subjects  for  the  heaviest 


CONTROVERSIES.  IO5 

taxation.^  And  generally  they  are  taxed  more  or 
less  completely.  They  contend  against  the  tax,  in- 
fluence the  legislature  and  delay  the  enactment  of 
the  law.  But  sooner  or  later  they  are  obliged  to 
yield.  There  are  few  States  more  subject  to  rail- 
road influence  than  the  State  of  New  Jersey,  and 
yet  New  Jersey,  after  a  long  and  bitter  contest,  has 
compelled  its  railroads  to  pay  their  full  quota  of  the 
taxes  of  the  State.' 

As  regards  exemptions  from  taxation  there  is  no 
longer  any  difference  of  opinion.  These  exemptions 
were  granted  with  a  lavish  hand  in  the  early  days  of 
railroads.  The  exemption  was  made  a  part  of  the 
charters  themselves.  The  result  was  that  the  States 
soon  found  a  vast  property  enjoying  the  protection 
of  government  without  contributing  to  its  support. 
Then  the  legislatures  attempted  to  repeal  the  ex- 
emptions. But  here  the  decisions  of  the  Supreme 
Court  of  the  United  States  blocked  the  way.  The 
Dartmouth  College  case  had  decided  that  a  corpo- 
rate charter  was  a  contract  and  could  not  be  amended 
or  repealed,  except  with  the  consent  of  the  corpora- 
tion itself.  Behind  the  bulwark  of  this  decision  the 
corporations  intrenched  themselves  and  contended 
that  their  exemptions  from  taxation  were  not  re- 
pealable.  And  the  Dartmouth  College  case  pro- 
tected them. 

Even    so    calm    and    judicial    a   writer   as   Judge 
Cooley  says  of  this  decision  : 

'  See  Chapter  IV.  on  Natural  Monopolies. 

'  See  Chapter  IV.  concerning  this  subject  further. 


Io6  THE   CORPORATION   PROBLEM. 

"  It  is  under  the  protection  of  the  decision  in  the  Dartmouth  Col- 
lege Case  that  the  most  enormous  and  threatening  powers  in  our 
country  have  been  created  :  some  of  the  great  and  wealthy  corpora- 
tions actually  having  greater  influence  in  the  country  at  large,  and 
upon  the  legislation  of  the  country,  than  the  States  to  which  they 
owe  their  corporate  existence.  Every  privilege  granted  or  right  con- 
ferred— no  matter  by  what  means  or  on  what  pretence — being  made 
inviolable  by  the  Constitution,  the  government  is  frequently  found 
stripped  of  its  authority  in  very  important  particulars,  by  unwise, 
careless,  or  corrupt  legislation  ;  and  a  clause  of  the  Federal  Constitu- 
tion, whose  purpose  was  to  preclude  the  repudiation  of  debts  and  just 
contracts,  protects  and  perpetrates  the  evil,"^ 

On  the  other  hand,  Mr.  Justice  Miller,  in  an  ad- 
dress at  the  University  of  Michigan,  said,  regarding 
this  case : 

"  The  main  feature  of  the  case,  namely,  that  a  State  can  make  a 
contract  by  legislation  as  vrell  as  in  any  other  way,  and  that  in  no 
such  case  shall  a  subsequent  act  of  the  legislature  interpose  any 
effectual  barrier  to  its  enforcement  where  it  is  enforceable  in  the 
ordinary  courts  of  justice,  has  remained. 

"  The  result  of  this  principle  has  been  to  make  void  innumerable 
acts  of  State  legislatures,  intended  in  times  of  disastrous  financial 
depression  and  suffering  to  protect  the  people  from  the  hardships  of 
a  rigid  and  prompt  enforcement  of  the  law  in  regard  to  their  con- 
tracts, and  to  prevent  the  States  from  repealing,  abrogating,  or 
avoiding  by  legislation  contracts  fairly  entered  into  with  the  other 
parties. 

' '  This  decision  has  stood,  from  the  day  it  was  rendered  to  the  present 
hour,  as  a  great  bulwark  against  popular  effort  through  State  legisla- 
tion to  evade  the  payment  of  just  debts,  the  performance  of  obligatory 
contracts,  and  the  general  repudiation  of  the  rights  of  creditors." 

Exemptions,  consequently,  became  very  valuable. 
Legislatures  were  bribed  to  grant  them  and  a  great 
injustice  was  done  to  tax-payers  by  reason  of  them. 
It  was  long  before  a  remedy  was  found.     But  when 

^  Cooley's  "  Constitutional  Limitations,"  5th  ed.,  33S,  n. 


CONTROVERSIES.  lO/ 

the  remedy  came  it  was  effectual.  The  Dartmouth 
College  case  and  the  exemptions  were  circumvented 
by  constitutional  and  statutory  provisions  in  the 
various  States  to  the  effect  that  all  charters  there- 
after granted  should  be  subject  to  alteration,  amend- 
ment, or  repeal  at  the  will  of  the  legislature.  The 
exemptions  have  largely  disappeared  and  are  now 
becoming  a  thing  of  the  past.  The  constitutions 
of  most  of  the  States  of  the  Union  prohibit  the  grant- 
ing of  special  privileges,  and  under  these  prohibitions 
any  future  exemption  from  taxation  would  be  null 
and  void. 

INCORPORATING    IX  ONE  STATE  AND  DOING  ALL  BUSINESS 
IN    ANOTHER    STATE. 

One  of  the  innermost  business  secrets  of  a  corpora- 
tion lawyer  is  the  incorporation  of  companies  in  one 
State,  although  all  of  the  business  of  those  companies 
is  to  be  done  in  another  State.  This  is  a  common 
practice  by  reason  of  the  fact  that  some  States  are 
Hberal  and  favorable  towards  corporations,  while 
others  are  harsh,  restrictive,  and  hostile.  The  law 
says  that  it  is  legal  to  incorporate  in  one  State  with 
the  intention  of  doing  all  the  business  in  another 
State.  Hence  it  is  that  those  who  are  about  to  em- 
bark in  a  corporate  enterprise  compare  the  laws  of  the 
various  States  on  the  questions  of  what  liability  is  at- 
tached to  stock  ;  for  what  kinds  of  business  incorpora- 
tion may  be  had  ;  what  the  liabilities  of  the  directors 
are;  what  incorporation  fee  is  required  ;  what  taxes 
are  levied  ;  where  corporate  meetings  must  be  held  ; 
what  is  the  method  of  voting  at  elections ;  who  may 


I08       THE  CORPORATION  PROBLEM. 

be  directors ;  what  capital  stock  is  allowed ;  how 
much  land  may  be  owned  by  the  corporation  ;  what 
powers  are  conferred ;  and  all  the  miscellaneous 
rights,  duties,  and  liabilities  which  are  created  by 
constitutional  and  statutory  provisions.  He  avoids 
New  York,  Pennsylvania,  and  Ohio  on  account  of 
the  incorporation  tax  and  dangerous  liabilities  at- 
tached to  the  stock.  He  thinks  twice  before  he 
concludes  to  incur  the  large  annual  tax  levied  by 
New  Jersey.  He  has  no  fondness  for  the  full  liabil- 
ity of  stockholders  in  California.  And  he  finally 
incorporates  in  West  Virginia,  Kentucky,'  Florida, 
Connecticut,  Maine,  Illinois,  or  New  Jersey. 

These  roaming  and  piratical  corporations  are  gen- 
erally the  manufacturing  or  business  concerns.  A 
railroad,  gas,  or  other  corporation,  which  exercises 
the  right  of  eminent  domain,  or  uses  the  streets, 
cannot  safely  operate  under  a  foreign  charter.  But 
the  fact  that  numberless  corporations  may  go  into 
other  States  for  their  charters  is  having  an  influence 
on  the  old  and  conservative  States.  It  is  convincing 
them  that  their  laws  relative  to  corporations  must  be 
less  restrictive,  burdensome,  and  hostile.  The  law 
moves  slowly,  but  ultimately  it  must  follow  the  trend 
of  trade,  and  especially  is  this  so  of  the  law  of 
corporations. 

Limitations  on  the  amount  of  the  capital  stock 
have  proved  futile.  The  object  generally  is  to  pre- 
vent the  issue  of  watered  stock,  but  the  limitation 
has  lamentably  failed  to  accomplish  this  object. 
The  amount  of  capital  stock  should  be  left  to  the 
discretion  of  the  incorporators. 


CONTROVERSIES.  IO9 

So  also  as  to  the  qualifications  for  directors.  The 
statute  often  requires  them  to  be  stockholders, 
sometimes  to  be  citizens,  and  sometimes  to  be  resi- 
dents of  the  State.  Such  restrictions  as  these  serve 
no  useful  purpose.  The  stockholders  are  much 
better  qualified  than  the  State  to  know  who  will 
best  serve  them  as  directors. 

The  decided  tendency  of  all  the  States  is  to  allow 
incorporation  for  any  lawful  business  whatsoever. 
There  may  be  good  reason  for  prohibiting  the  incor- 
poration of  construction  companies  for  the  con- 
struction of  railroads,  inasmuch  as  the  construction 
company  in  case  of  failure  causes  hardship  and  loss 
to  laborers.  And  there  may  be  objections  to  the 
formation  of  large  land  corporations.  But  aside 
from  these,  the  free  incorporating  act  is  destined  to 
prevail.  Individuals  should  be  allowed  to  do  any 
and  all  classes  of  business  through  the  medium  of 
corporations.  It  is  the  coming  mode  of  doing  busi- 
ness on  a  large  scale.  The  progressive  States  are 
seeing  this,  and  are  allowing  incorporation  for  any 
business  that  is  lawful  in  itself.  New  York  has  done 
so  within  the  past  year. 

The  place  of  stockholders'  meetings  should  be  left 
optional  with  the  stockholders  themselves.  The 
law  at  present  is  that  these  meetings  must  be  within 
the  State  that  granted  the  charter,  unless  the  statutes 
allow  them  to  be  held  out  of  that  State.  The  enter- 
prising little  State  of  West  Virginia  saw  the  advan- 
tage of  changing  the  old  rule,  and  did  so.  Indeed, 
its  corporation  statutes  are  marvels  of  alluring 
attractiveness  for  the    incorporation   of    enterprises 


no  THE   CORPORATION   PROBLEM. 

located  In  other  States.  It  allows  incorporation  for 
any  legal  business,  except  buying  and  selling  real 
estate  ;  the  capital  stock  may  be  five  million  dollars 
or  less  ;  there  is  no  personal  liability  of  stockholders; 
any  person  may  be  allowed  to  act  as  director;  the 
cost  of  incorporation  and  the  annual  tax  are  low  ;  - 
cumulative  voting  is  provided  for;  the  right  of  the 
stockholders  to  remove  directors  is  given  ;  and  stock- 
holders' meetings  may  be  held  anywhere  the  stock- 
holders wish. 

It  is  easy  to  see  why  men  incorporate  in  one  State 
although  they  intend  to  transact  all  the  business  of 
the  company  in  another  State. 

SPECIAL  CHARTERS. 

At  the  beginning  of  this  century  corporations  were 
formed,  not  by  filing  a  certificate  under  a  general 
incorporating  law,  as  at  present,  but  by  obtaining  a 
special  charter  from  the  legislature.  But  soon  it 
was  found  that  this  business  occupied  most  of  the 
time  of  the  legislatures.  They  were  being  turned 
into  mills  to  grind  out  special  charters.  It  was  found 
also  that  gross  bribery  of  the  legislators  was  being 
resorted  to  for  the  purpose  of  obtaining  these  char- 
ters. Corruption  ran  rampant,  and  the  system  be- 
came intolerable.  Something  had  to  be  done  to 
stem  the  tide  of  legislative  demoralizatfon. 

A  remedy  has  been  found  and  adopted  in  most  of 
the  States.  Constitutional  prohibitions  against  the 
granting  of  any  special  charters  by  the  legislature 
have  been  enacted.    These  prohibitions,  followed  by 


CONTROVERSIES.  1 1 1 

the  general  incorporating  laws,  which  allow  incor- 
poration without  any  application  whatsoev^cr  to  the 
legislature,  have  cured  the  evil  in  those  States  that 
have  adopted  this  remedy. 

])ut  many  of  the  States  still  permit  their  legisla- 
tures to  grant  special  charters.  This  is  notably  so  in 
the  South.  But  the  most  flagrant  instance  of  this 
evil  that  still  survives  is  found  in  the  small  but  wide- 
awake State  of  Connecticut.  The  granting  of  special 
charters  still  continues  in  Connecticut  and  is  the 
chief  part  of  the  legislature's  business.  As  a  result, 
Connecticut  is  the  tramping-ground  for  the  projectors 
of  all  sorts  of  speculative  and  financial  schemes. 
The  grants  from  imperial  magnates  three  centuries  ago 
were  a  mere  bagatelle  as  compared  with  the  fabulous 
prerogatives  to  which  a  Chief  Executive  of  Connecti- 
cut is  now  able  to  attach  his  signature  in  the  way  of 
special  charters. 

The  following  article,  which  appeared  in  1889, 
throws  light  on  the  situation  in  Connecticut : 

"  Ten  years  ago  the  abuse  of  the  joint-stock  laws  of  the  State  had 
reached  such  a  stage  that  heroic  measures  became  necessary.  In  iSSo 
the  legislature,  in  a  spasm  of  reform,  annulled  the  corporate  existence 
of  1,246  joint-stock  companies  in  the  State  which  had  failed  to  comply 
with  the  statutes  in  one  way  or  another.  Eighty-nine  of  these  com- 
panies were  in  Bridgeport,  24  in  Norwalk,  and  17  each  in  Stamford 
and  Danbury.  In  Hartford  the  number  abolished  was  149.  New 
Haven  led  in  the  list  with  iSg.  At  Middletown  3S  companies  were 
annulled,  while  the  town  of  Derby  furnished  52.  Meriden  ran  one 
ahead  of  Middletown,  while  Waterbury  scored  a  total  of  63,  and  Nor- 
wich 57.  Tlie  old  whaling  port  of  New  London  furnished  only  16 
companies  for  legislative  decapitation.  After  the  axe  had  fallen  in 
18S0  there  were  less  than  1,175  joint-stock  companies  left  in  the  State. 
The  legislature  of  i88i  was  expected  to  prove  conservative  in  the 


112  THE    CORPORATION    PROBLEM. 

matter  of  legislating  for  corporations.  A  number  of  joint-stock  com- 
panies, however,  appeared  asking  for  additional  franchises.  The 
speculative  interests  in  the  Republic  of  Mexico  also  furnished  a 
tempting  field,  and  before  the  session  was  through  with,  29  companies 
were  incorporated,  with  a  capital  of  $5,382,000  at  the  start.  In  the 
aggregate  these  companies  were  authorized  to  increase  their  capital  to 
$28,365,000.  The  International  Construction  Company  was  one  of 
the  organizations  incorporated.  Its  capital  was  $1,000,000,  with 
authority  to  increase  the  amount  to  $10,000,000.  The  Rapid  Con- 
struction Company  was  also  incorporated  in  188 1.  Its  capital  stock 
was  $1,000,000,  with  power  to  increase  to  $6,000,000. 

"  The  legislature  of  1887  was  besieged  with  persons  clamoring  for 
corporate  privileges.  During  the  session  117  acts  of  incorporation 
were  passed.  Of  this  number,  54  were  for  companies  engaging  in 
business  and  speculative  enterprises.  The  aggregate  capital  at  the 
start  was  $10,475,000.  The  authorized  increase  was  fixed  at  $55,- 
060,000.  .  .  .  The  International  Company  of  Mexico,  which  was 
authorized  by  the  legislature  of  1885,  received  power  to  increase  its 
capital  stock  to  $20,000,000  in  1887. 

"  These  facts  will  show  how  deeply  rooted  the  custom  has  become 
in  the  Connecticut  legislature  of  granting  acts  of  incorporation.  Since 
1880  it  has  developed  into  an  agency  of  tremendous  power.  The 
current  season  is  not  likely  to  be  less  marked  than  the  session  of  1887 
by  corporate  legislation.  Within  two  weeks  Gov.  Bulkeley,  by 
attaching  his  name  to  the  Thomson-Houston  Bill,  extended  to  that 
company  the  right  to  increase  its  capital  stock  to  $10,000,000. 
Military  and  Grand-Army  organizations  throughout  the  State,  secret 
societies  of  all  kinds,  and  even  the  churches  are  also  applicants  for 
incorporation.  The  special  privileges  secured  by  charter  seem  to  be 
the  controlling  motive  in  most  cases.  It  is  evidently  the  era  of  special 
legislation  and  the  advancement  of  private  interests.  The  evil  effects, 
as  in  the  abuses  of  the  joint-stock  laws,  Mdll  be  felt  sooner  or  later. 
Prior  to  the  war,  the  granting  of  a  charter  to  a  corporation  was  a 
matter  for  long  and  serious  consideration.  The  interests  of  the  public 
were  not  overlooked.  The  result  was  that  the  corporations  receiving 
these  exceptional  prerogatives  are  among  the  strongest  institutions 
financially  in  the  State.  Under  the  present  wholesale  system  acts  of 
incorporation  exceed  one  a  day  during  the  session.  Much  of  the 
legislation  in  this  direction  has  been  vicious.  But  little  of  it  has 
received  the  searching  supervision  of  the  legislators." 


CONTROVERSIES.  1 1 3 

Even  Connecticut,  however,  and  the  Southern 
States  will  tire  of  this  abuse,  and  sooner  or  later  all 
the  States  will,  by  constitutional  enactment,  pro- 
hibit their  legislatures  from  granting  special  charters. 
The  leading  men  of  Connecticut  are  even  now  labor- 
ing to  bring  about  a  reformation  in  this  regard. 
Such  a  prohibition  has  done  much  to  purify  legis- 
lative halls,  and  it  has  prevented  the  grants  of  ex- 
clusive and  unjust  franchises  to  the  detriment  of  the 
people  at  large.  It  has  dispensed  with  a  corrupt 
lobby,  and  has  rendered  necessary  a  cheap,  simple, 
and  quick  mode  of  incorporation,  and  it  has  remedied 
a  great  evil  with  certainty  and  directness.' 

'  In  Wells  &c.  Co.  z's.   Northern  Pac.  Ry.  Co.,  23  Fed,  Rep.,  469 

(1S84),  the  court  said:  "  Ever)'body  \vho  is  familiar  at  all  ^vitll  the 
history  of  the  growth  and  organization  of  corporations  in  the  United 
States  knows  that  this  rule,  requiring  corporations  to  be  organized 
under  a  general  law,  is  the  growth  of  some  years,  and  has  grown 
out  of  the  confusion,  corruption,  the  partial  and  inequitable  legisla- 
tion that  was  the  result  of  allowing  parties  to  go  before  the  legis- 
lature, and  ask  for  a  special  charter.  The  time  of  the  legislature 
was  unnecessarily  consumed  by  it  ;  the  integrity  of  the  members  of 
the  legislature  was  unduly  exposed  ;  or,  through  the  ignorance  or 
carelessness  of  the  legislature,  and  the  astuteness  and  diligence  of 
designing  and  overreaching  men,  there  were  constantly  coming  to 
light  obscure  clauses  in  these  acts  of  the  legislature,  giving  powers 
and  granting  privileges  which  were  unjust,  inequitable,  and  which 
would  never  have  been  done  with  the  knowledge  of  the  legislature." 

In  Nelson  vs.  McArthur,  38  Mich.,  207,  the  court  said  in  regard 
to  the  constitutional  provision  for  general  incorporating  acts  :  "  The 
great  purpose  of  this  provision  was  to  introduce  a  system  of  legislation 
in  regard  to  the  institution  of  corporations,  which  would  exclude  the 
corruption  and  party  favoritism  which  had  too  often  accompanied  the 
method  previously  in  vogue,  and  to  secure  as  far  as  practicable  for 
all  the  people  of  the  State  an  equality  of  opportunity,  and  a  guard 
against  sectional  discrimination." 
8 


114       THE  CORPORATION  PROBLEM, 

EXCLUSIVE    PRIVILEGES    AND    MONOPOLIES. 

An  exclusive  privilege  is  a  monopoly  granted  by 
a  legislature  to  a  corporation.  It  generally  is  given 
to  a  railroad,  gas  company  or  water-works  company. 
It  forbids  the  building  of  any  competing  concern 
for  a  given  number  of  years,  and  sometimes  it  is  an 
exclusive  privilege  that  is  to  last  forever.  It  has 
been  a  prolific  source  of  legislative  corruption,  and 
has  been  one  of  the  worst  abuses  that  has  come 
upon  a  free  people. 

The  history  of  the  English-speaking  people  has 
been  that  of  a  long  and  arduous  struggle  against 
governmental  usurpation  and  monopoly.  The  word 
"  monopoly "  formerly  had  a  restricted  meaning. 
The  kings  of  England,  from  an  early  date  down  to 
James  II.,  were  accustomed  to  grant  a  monopoly  or 
exclusive  privilege  to  particular  persons  to  manu- 
facture or  sell  articles  of  commerce  specified  in  a 
grant.  The  English  people  and  parliament  con- 
tended that  the  king  had  no  power  to  grant  such  a 
monopoly,  and  that  Parliament  alone  could  legally 
give  these  exclusive  privileges.  The  courts  sus- 
tained the  position  of  Parliament,  and  the  ancient 
grants  of  monopoly  by  the  king  were  declared  to  be 
illegal  and  void. 

In  recent  times,  however,  the  word  ''  monopoly  " 
has  been  given  a  broader  meaning.  It  is  applied  to 
the  exclusive  privileges  of  railroad,  gas,  electric-light, 
water-works,  and  bridge  corporations,  whereby  the 
construction  of  competing  works  is  forbidden.  Dur- 
ing the  first  half  of  this  century  the  granting  of  these 
exclusive  privileges  was  of  constant  occurrence.    But 


CONTROVERSIES.  1 1 5 

in  the  course  of  time  they  became  a  grievous  burden 
which  could  not  be  done  away  with.  Having  a 
monopoly  they  charged  extravagant  prices,  gave 
poor  service  and  misused  the  public.  The  courts 
were  hostile  to  them,  and  yet  were  obliged  by  law 
to  uphold  their  exclusive  privileges.  The  legis- 
lature could  not  repeal  them  because  the  Dartmouth 
College  case  blocked  the  way. 

Hence  it  was,  as  already  stated,  that  two  consti- 
tutional provisions  were  devised  and  enacted  by 
most  of  the  States.  The  one  ordained  that  all 
charters  should  be  subject  to  alteration,  amendment, 
and  repeal  at  the  will  of  the  legislature.  The  other 
provided  that  no  exclusive  provisions  should  be 
granted  at  all.  The  latter  provision  goes  to  the  root 
of  the  difficulty,  but  the  former  is  a  safeguard  where 
the  latter  provision  does  not  exist.  Under  these 
provisions  the  monopolies  of  exclusive  privileges  are 
passing  away.  They  no  longer  constitute  an  issue 
of  the  day. 

Monopoly,  however,  is  a  hydra-headed  monster 
that  reappears  in  new  forms.  One  of  the  great 
problems  of  the  times  is  how  to  deal  with  the 
natural  monopoly  which  every  railroad,  street  rail- 
road, gas,  telegraph,  telephone,  electric-light,  and 
water-works  corporation  is  the  owner  of  to-day. 
This  class  of  monopolies,  however,  is  considered 
elsewhere.' 

Another  of  the  great  problems  before  the  people 
is  the  monopolies  which  are  being  created  by  the 
"  Trusts," — the    industrial    combinations    and    con- 

'  See  Chapter  IV. 


Il6  THE   CORPORATION   PROBLEM. 

solidations  which  are  springing  up  day  by  day.  This 
subject  also  is  considered  elsewhere.' 

POLITICAL    CORRUPTION. 

The  amount  of  deserved  and  also  undeserved 
abuse  that  has  been  heaped  upon  corporations  for 
the  political  corruption  ascribed  to  them  would  fill 
many  books.  That  such  corruption  exists,  and  exists 
to  a  frightful  extent,  there  is  not  a  particle  of 
doubt,  and  that  a  very  large  part  of  it  is  due  to  cor- 
porations is  also  unquestionably  true.  That  it 
should  exist  is  no  surprise,  when  one  considers  the 
controversies  which  have  already  been  referred  to. 
The  reason  why  corporations  resort  to  political  cor- 
ruption is  because  those  controversies  exist.  Cor- 
porations, in  order  to  protect  themselves  and  to 
succeed  in  their  schemes  of  aggrandizement,  have 
resorted  to  money,  bribery,  political  corruption, 
and  unmitigated  rascality.  Their  corrupt  control 
of  legislatures  and  municipalities  have  in  large  part 
been  the  means  of  their  safety,  their  power,  and 
their  success.  And  there  is  nothing  strange  in  the 
fact  that  the  corporations  interfere  with  and  seek  to 
control  government.  Property  protects  itself  and 
works  for  itself  always.  If  politics  can  injure  or  aid 
property,  then  property  interferes  with  and  strives 
to  control  politics.  Especially  is  this  the  case  with 
railroad  property  or  manufacturing  property,  both 
of  which  are  affected  by  the  favorable  or  unfavorable 
action  of  government.  Government  may  make  or 
unmake  the  manufacturing  corporation  by  increasing 

^  See  Chapter  V. 


CONTROVERSIES.  II7 

or  decreasing  a  protective  tariff.  Government  may 
make  or  unmake  a  railroad  by  granting  or  refusing 
new  franchises,  or  by  allowing  or  reducing  high 
charges  for  traffic.  For  many  years  Congress  has 
held  in  its  hands  the  future  of  the  Union  Pacific 
Railroad  by  reason  of  the  power  of  Congress  to  fore- 
close or  continue  the  mortgages  which  the  national 
government  holds  upon  the  railroad  itself.  It  has  a 
similar  power  over  other  roads  as  regards  the  for- 
feiture of  land  grants.  Who  can  wonder  that  cor- 
porations have  interfered  with  government,  and  have 
interfered  so  much,  that  the  very  word  "  corporation  " 
has  become  with  many  people  a  synonym  for  cor- 
ruption ?  The  extent  of  that  corruption — its  rami- 
fications into  legislatures,  municipalities,  the  halls  of 
Congress,  and  the  judiciary — is  a  subject  too  vast, 
too  vague,  and  too  much  a  matter  of  abuse  and  of 
charges,  undoubtedly  true  but  largely  without  proof, 
to  tempt  one  to  enter  upon  it.  The  corruption 
exists.     The  problem   is  how  is  it   to  be  cured. 

"  That  already  the  legislative  bodies  of  the  States  of  the  Union  are 
as  wax  in  the  hands  of  the  modeler,  under  the  manipulations  of  these 
great  corporations,  is  a  truth  which  in  all  the  more  densely  populated 
.States,  in  the  North  and  the  East,  the  people  have  been  made  to  feel. 
How  to  get  back  their  control,  and  yet  not  change  it  into  a  control  of 
a  \ery  dangerous  character,  by  adding  the  supervision  of  the  expen- 
ditures of  the  enormous  revenues  of  the  railways  to  the  supervision  of 
the  enormous  revenues  of  the  United  States,  and  of  State  and  local 
administrations,  administered  as  they  are  in  the  main  by  politicians 
not  much,  if  any,  above  the  status  of  the  railway  magnates,  is  proba- 
bly the  most  serious  problem  which,  since  the  abolition  of  slaver)', 
has  confronted  the  people  of  the  United  States."  • 

'  "  Cyclopaedia  of  Political  Science,"  vol.  iii. 

Jeans,  on  "  Railway   Problems,"  says,  p.  46  :    "  The  amounts  that 


Il8  THE   CORPORATION   PROBLEM. 

THE    REMEDY. 

Sometimes  blindly,  sometimes  intelligibly,  but 
always  persistently,  a  solution  of  all  the  questions 
to  which  corporations  have  given  rise  is  being  sought. 
Many  of  the  evils  have  been  cured  by  a  specific 
remedy.  But  this  is  not  enough.  "  The  Corporation 
Problem "  in  its  entirety  has  become  one  of  the 
great  social  questions  of  the  age.  It  is  a  problem 
which  the    present  generation    meets    face  to   face. 

have  been  expended  in  the  United  Kingdom  in  promoting  and 
opposing  [Railway]  bills  in  Parliament  have  been  enormous.  Ac- 
cording to  a  return  presented  to  the  House  of  Commons  in  1883,  a 
total  expenditure  of  ;^3,924,7i2  had  been  incurred  on  this  account 
between  1872  and  1882.  As  the  increase  of  railway  capital  in  the 
United  Kingdom  during  the  same  period  was  198  millions, 
it  follows  that  the  amount  spent  over  Parliamentary  battles 
was  two  per  cent,  of  the  total  addition  to  capital  expenditure 
in  these  ten  years.  If  it  were  correct  to  assume  that  the  same  per- 
centage of  the  total  capital  expenditure  had  been  wasted  in  Parlia- 
mentary contests  over  the  whole  of  our  railway  history,  the  aggregate 
sum  so  spent  would  amount  to  about  sixteen  millions  sterling.  It  is 
probable,  however,  that  the  actual  expenditure  has  been  greater  even 
than  this,  since  the  fights  were  much  fiercer,  and  more  costly  in  pro- 
portion to  the  capital  involved,  in  the  earlier  history  of  the  system 
than  in  its  later  stages  of  development."  And  on  pp.  429,  430: 
"The  Parliamentary  expenses  incurred  in  obtaining  the  Act  for  the 
Great  Western  Railway,  as  originally  constructed,  amounted  to 
/^Sj,ig7,  or  about  jCuS  P^r  mile.  For  the  London  and  Birmingham 
line  Parliamentary  expenses  amounted  to  j(^j2,S68,  or  ;i^662  per  mile. 
In  many  other  cases,  the  cost  of  fighting  for  the  Acts  under  which 
the  lines  were  constructed  involved  a  correspondingly  lavish  scale  of 
expenditure.  .  .  .  There  is  not  much  published  information 
respecting  the  prices  that  have  actually  been  paid  for  the  land 
acquired  by  railway  companies."  And  on  p.  32  :  "  That  very  large 
sums  were  expended  in  conciliating  opposition  over  and  above  the 
amounts  actually  spent  in  consideration  of  the  supposed  or  adjudi- 


CONTROVERSIES.  I  IQ 

There  have  been  theories,  experiments,  and  world- 
wide movements,  having  for  their  purpose  the  dis- 
position of  these  questions.  And,  yet,  all  the  efforts 
of  thinkers,  philosophers,  and  statesmen  seem  to 
come  to  naught.  A  solution  of  "  The  Corporation 
Problem "  seems  to  be  coming,  from  the  natural 
march  of  events,  even  in  spite  of  legislative  enact- 
ments and  hostile  interests.  As  will  be  seen  here- 
after, the  solution  is  to  be  by  consolidations  on  a 
colossal  scale. 


cated  value  of  the  land,  is  one  of  the  best  known  facts  in  English 
railway  histor>'."  And  on  p.  430,  Mr,  Jeans  quotes  to  the  effect  that 
"  The  first  Eastern  Counties  line  was  said  to  have  paid  ;^i2,ooo  per 
mile  for  land  through  an  agricultural  country,  being  about  ten  times 
its  real  value.  This  habit  of  exaction  has  been  perpetuated  to  our 
own  day.  As  an  every-day  instance,  I  may  mention  that  only  a  few 
months  ago  a  gentlemen  of  great  wealth  was  selling  to  a  railway 
company,  which  he  had  supported  in  Parliament,  thirty  acres  of  grass 
land,  of  which  the  admitted  agricultural  value  was;^ioo  an  acre,  and 
three  acres  of  limestone,  of  which  the  proved  value  to  a  quarryman 
"^vas  /"soo  an  acre.  There  was  no  residential  damage,  and  the  rail- 
way skirted  the  outside  of  the  estate.  The  price  of  the  whole  in  an 
auction-room  would  have  been  about  ;^4.ooo.  The  proprietor's 
accents,  supported  by  a  troop  of  eminent  valuers,  demanded  ;^2 5, OCX)." 
Mr.  Jeans  figures  "that  in  respect  of  the  land  acquired  for  the 
present  railway  mileage  of  the  United  Kingdom — which  at  the  end 
of  1885  was  approximately  about  19,000  miles, — the  expenditure 
incurred  would  be  about  one  tenth  of  the  total  capital  cost  of  British 
railways  to  the  same  date,  or,  in  more  exact  figures,  76  mil- 
lions sterling."  In  America  the  cost  of  the  land  for  railroads,  includ- 
ing the  buildings  erected  upon  the  land,  is  an  average  of  £22,^  per 
mile,  while  in  England  it  has  been  ;^4,ooo  per  mile.  On  p.  35,  Mr. 
Jeans  says  that  the  railroads  owned  part  of  all  the  land  in  the  United 
Kingdom,  but  that  this  part  has  cost  the  railroads  "about  one  twelfth 
of  the  estimated  current  agricultural  value  of  the  whole  land  of  the 
country." 


CHAPTER  III. 

REMEDIES   FOR   THE    RAILROAD   PROBLEM. 

Co-operative  or  profit-sharing  associations  and  railroad  in- 
surance as  remedies — State  socialism  as  a  remedy — 
State  ownership  of  railroads  as  a  remedy — Periodical 
leasing  of  franchises  by  the  State  as  a  remedy — State 
regulation  of  railroads  as  a  remedy — Railroad  consoli- 
dation as  a  remedy. 

The  various  abuses  and  problems,  growing  out  of 
railroads  and  other  corporations,  have  been  discussed 
in  the  preceding  chapter.  The  specific  remedy  for 
those  abuses  has  also  been  pointed  out  in  cases  where 
such  a  remedy  exists.  But  in  addition  to  these  there 
have  been  proposed  and  tried  a  few  more  general 
and  more  comprehensive  modes  of  solving  *'  The 
Corporation  Problem."  Most  of  them  apply  to  rail- 
roads particularly,  inasmuch  as  the  railroad  problem 
is  the  chief  part  of  the  corporation  problem.  These 
sweeping  remedies  have  from  time  to  time  excited 
wide  discussion.  They  have  been  tried  or  are  being 
tried  in  Europe  and  America.  They  are  the  most 
important  subjects  connected  with  social  science,  and 
are  among  the  greatest  living  questions  of  the  day. 

In  addition  to  the  remedies  set  forth  in  this  chap- 

I20 


REMEUIKS    irUR   THE    RAILROAD    PROBLEM.      121 

ter,  Still  others  have  been  proposed.  Hudson,  in  his 
work  on  "  Railways  and  the  Republic,"  advocates 
the  phm  uf  separating  railway  ownership  from  the 
business  of  transportation — that  is,  giving  the  rail- 
roads the  station-houses,  freight-houses,  terminals, 
and  tracks  ;  allowing  an)-  persons  to  own  cars,  and 
run  those  cars  over  any  tracks  ;  and  permitting  the 
railroads  to  charge  for  the  use  of  the  tracks.  This 
plan  is  very  old,  and  has  been  found  impracticable. 
It  was  adopted  in  the  first  days  of  the  railway. 
From  1825  to  1S35  the  mistake  was  made  that,  like 
the  canal,  the  railway  would  be  built  by  one  class  of 
capitalists  and  the  transportation  part  of  the  busi- 
ness would  be  carried  on  by  another  class  of  capital- 
ists or  by  the  public  generally.  In  New  York  the 
early  charter  of  the  Ithaca  and  Owego  Railroad 
contained  the  following  provision  : 

"Sec.  12.  All  i)ersons  paying  the  toll  aforesaid  may,  with  suita- 
ble and  proper  carriages,  use  and  travel  upon  the  said  railroad,  sub- 
ject to  such  rules  and  regulations  as  the  said  corporators  are  authorized 
to  make  by  the  9th  section  of  this  act." 

But  the  plan  did  not  prove  feasible,  and  if  adopted 
now  it  would  leave  the  railway  problem  still  un- 
solved. It  would  create  two  monopolies  where  but 
one  now  exists.  There  would  be  a  corporation  to 
own  the  tracks  and  appurtenances,  and  a  corporation 
to  own  and  run  the  cars.  Mr.  Hudson's  plan  has 
been  dead  for  fifty  years.' 

'  Professor  Henry  C.  .\dams  would  take  a  long  step  backwards  in 
order  to  remedy  the  evils  arising  from  corporations.  In  a  paper  read 
before  the  American  Economic  Association,  in  Washington,  Decem- 
ber, 1S90.  he  took  the  position  that    when  industries  are  small  and 


122  THE   CORPORATION   PROBLEM. 

CO-OPERATIVE     OR     PROFIT-SHARING     ASSOCIATIONS    AND 
RAILROAD    INSURANCE    AS    REMEDIES. 


John  Stuart  Mill  once  said  : 

"  I  must  repeat  my  conviction  that  the  industrial  economy  which 
divides  society  absohitely  into  two  portions,  the  payers  of  wages  and 
the  receivers  of  them,  the  first  counted  by  thousands  and  the  last  by 
millions,  is  neither  fit  for  nor  capable  of  indefinite  duration,  " 

dealings  are  with  personal  friends,  indifference  to  the  public  good 
results  in  personal  loss,  but  in  corporations  with  world-wide  business, 
claiming  privileges  and  rights  intended  for  the  individual,  methods 
and  practices  immoral  and  injurious  to  the  public  weal  go  unpun- 
ished. Accordingly  he  advocated  the  following  propositions:  I. 
The  granting  of  corporate  privileges  should  be  limited  to  those  in 
which  the  necessity  of  the  public  overbalances  the  necessity  of  the 
individual.  2.  In  the  case  of  the  latter,  incorporation  should  be 
made  obligatory.  3.  Such  corporations  should  be  forced  to  make 
reports  sufficient  to  give  opportunity  for  public  regulation  and  control 
by  government,  which  is  the  great  corporation  out  of  which  all  others 
arise.  4.  Other  business  not  suffered  and  compelled  to  incorporate 
should  be  subject  to  inquiry,  but  not  control.  Unless  these  principles 
are  accepted.  Professor  Adams  thought  we  might  be  forced  into  a 
complete  State  socialism,  wherein  we  would  lose  the  incalculable 
advantages  of  individual  initiative  and  enterprise. 

This  remedy  has  also  been  recently  advocated  by  Judge  N.  M. 
Hubbard,  of  Cedar  Rapids,  Iowa,  as  follows  :  "  All  private  corpora- 
tions for  pecuniary  profit  should  be  abolished,  except  only  those  of  a 
quasi-public  character,  such  as  railroad,  telegraph,  telephone,  insur- 
ance, banking  corporations,  and  the  like  ;  and  these  should  be  under 
the  control  of  public  law,  or  else  owned  and  managed  by  the  Govern- 
ment. Railroads  are  already  under  the  control  of  public  law.  The 
short  reason  is  that  corporations  destroy  individual  competition  in  the 
acquisition  of  wealth." 

And  in  support  of  the  same  idea  it  has  been  said  : 
"The    corporation   was  invented  to  do  something  that  the  public 
needed  to  have  done,  and  that  private  effort  could  not  well  do — to 
secure  limited  liability  in  undertakings  so  vast  that  men  could  not 


REMEDIES    FOR    THE    RAILROAD    PROBLEM.     1 23 

And  he  also  added  : 

"The  possibilities  of  changing  this  system  for  one  of  combina- 
tion without  dependence,  and  unity  of  interest  instead  of  organized 
hostility,  depend  altogether  upon  the  future  developments  of  the 
partnership  principle. 

Suffice  it  to  say  as  a  corollary  to  this  that  the 
partnership  principle  has  developed  into  the  corpo- 

afford  to  invest  in  them  without  some  protection  against  the  unlimited 
liability  of  a  partnership. 

"  From  this  simple  object  the  device  has  been  perverted  to  purposes 
of  oppression,  corruption,  and  monopoly.  It  is  used  as  a  means  of 
escaping  from  moral  as  well  as  financial  liability.  It  excuses  stock- 
holders in  a  factory,  for  example,  from  all  the  responsibility  they 
once  felt,  as  owners,  for  the  condition  and  treatment  of  their 
empltjyees. 

"  It  is  the  instrument  of  monopoly,  injustice,  political  corruption, 
and  all  forms  of  conspiracy  to  put  up  prices  and  levy  tribute  upon  the 
necessities  of  the  people. 

"  The  power  which  created  the  monster  is  bound  to  restrain  its 
evil  tendencies,  and  it  is  a  very  serious  question  whether  this  can  be 
done  otherwise  than  by  limiting  the  use  of  the  corporate  device  to 
those  quasi-public  undertakings  for  which  it  was  originally  intended." 

It  is  folly  to  talk  about  abolishing  the  corporation  merely  because 
it  can  be  used  in  a  few  instances  as  an  instrument  of  wrong.  Of  the 
vast  number  of  corporations  in  the  land,  manufacturing,  mercantile, 
banking,  insurance,  mining,  commercial,  and  business,  there  are  very 
few  which  are  guilty  of  the  wrongs  complained  of.  The  quasi-cor- 
porations are  the  very  ones  which  have  led  to  abuses  and  the  destruc- 
tion of  "individual  competition  in  the  acquisition  of  wealth."  The 
small  corporations — the  honest  ones — are  to  be  abolished,  while  the 
large  ones — the  guilty  ones — are  to  remain.  It  is  not  true  that  the 
"  simple  object  "  of  the  corporations  originally  was  "  limited  liabil- 
ity." That  was  by  no  means  the  only  object.  The  advantages,  ob- 
iects,  and  necessity  of  the  corporation  as  a  mode  of  doing  business 
are  set  forth  in  Chapter  I.  of  this  book.  The  remedy  of  abolishing 
the  corporation  would  be  a  long  step  backward  instead  of  forward. 
It  will  not  be  taken. 


124  'i^HE    CORPORATION    PROBLEM. 

ration,  and  that  the  corporation  is  to-day  being  used 
for  co-operative  enterprises  and  profit-sharing. 
Professor  Richard  T.  Ely  says : 

"  Corporations  and  co-operative  enterprises  will  become  more  and 
more  nearly  assimilated  until  they  can  scarcely  be  distinguished. 
.  .  .  The  captains  of  industry  will  yet  be  found  at  the  head  of 
co-operative  enterprises.  .  .  .  When  corporations  become  more 
truly  co-operative  with  respect  to  the  labor  element,  the  captains  of 
industry  will  not  disappear.  "  ^ 

And  the  corporation  is  well  fitted  for  carrying  out 
the  plan  of  co-operation.  The  business  is  done  by  a 
board  of  directors  ;  these  directors  are  elected  by  the 
shares  of  stock  ;  and  profits  remaining  after  wages 
and  interest  are  paid  belong  to  these  shares  of  stock. 
The  machinery  for  co-operation  is  perfect,  and  if  the 
employees  own  the  shares  of  stock,  and  if  they  elect 
men  of  ability  and  honesty  for  directors,  and  if 
money  can  be  borrowed  by  the  company  to  carry  on 
the  business,  then  the  success  of  co-operation  and 
profit-sharing  is  assured.  But  each  of  these  steps  has 
its  difficulties.  The  employees  have  not  the  money 
to  own  the  stock  ;  they  cannot  obtain  or  are  unwill- 
ing to  employ  the  best  talent  to  manage  their  enter- 
prise ;  and  they  cannot  induce  capitalists  to  loan 
money  to  the  enterprise  on  the  mere  security  of  the 
enterprise  itself.  Nevertheless  there  have  been 
many  attempts  at  such  a  co-operation,  and  in  some 
instances  these  attempts  have  been  successful. 

The  recent  transformation  of  the  great  dry-goods 
house  of  H.  B.  Claflin  &  Co.,  into  a  corporation,  and 
the  sale  of  a  majority  of  that  stock  to  the  employees 

'  Harper  s  Magazine,  July,  1887,  p.  266. 


REMEDIES   rOR   THE    RAILROAD    PROBLEM.     1 25 

of  the  house,  and  the  sale  of  the  remainder  of  the 
stock,  first  to  the  patrons  of  the  house  and  then  to 
the  pubUc,  is  a  remarkable  instance  of  co-operation 
through  a  corporation.  The  stock  was  subscribed 
for  many  times  over,  and  the  general  public  re- 
ceived only  five  or  ten  per  cent,  of  the  amount  it 
applied  for.  How  the  enterprise  will  succeed  can- 
not yet  be  told,  but  it  is  to  be  noted  that  the  stock 
already  commands  a  premium. 

Another  recent  and  attractive  instanceof  this  kind 
is  that  of  the  -Illinois  Central  Railroad  Company. 
This  railroad  is  one  of  the  oldest  in  the  country,  its 
charter  dating  back  into  the  fifties.  Its  stock  is 
dividend-paying  and  always  has  been.  The  company 
has  had  no  stock  for  sale,  but  it  proposes  to  assist 
any  of  its  officers  or  employees  to  buy  one  share  at 
a  time,  at  a  fair  market  price,  to  be  fixed  when  the 
purchase  is  made,  the  purchaser  to  pay  for  his  share 
in  sums  of  five  dollars  or  multiples  thereof.  On  the 
sums  so  paid  interest  is  to  be  credited  at  the  rate  of 
four  per  cent.,  and  when  the  sum  at  the  credit  of  any 
purchaser  amounts  to  the  sum  at  which  the  stock  was 
bought,  he  will  receive  a  certificate  for  his  share  of 
stock,  and  can  then,  if  he  wishes,  begin  the  purchase 
of  another  share.  The  purchaser  may,  however,  at 
any  time,  have  his  contract  cancelled  and  his  money 
returned  to  him  with  interest.  Thus  the  company 
assumes  the  entire  risk  of  a  fall  in  the  price  (^f  the 
shares  and  the  expense  of  doing  the  work.  The 
only  possibility  of  loss  will  be  in  the  event  that  the 
Company  becomes  insolvent.  This  proposition  of 
the  Illinois  Central  is  but  another  indication  that  the 


126  THE    CORPORATION    PROBLEM. 

railroad  corporations  are  striving  to  do  away  with 
strikes  and  labor  troubles,  and  that  co-operation 
is  being  resorted  to  in  order  to  end  the  hostility  now 
existing  between  employer  and  employee. 

Mr.  Abram  S.  Hewitt  in  an  address  delivered 
October  i,  1890,  said  on  this  subject: 

"  It  should  be  a  matter  of  congratulation  that  the  formation  of 
trades  unions  contemporaneously  with  the  rapid  growth  of  large  cor- 
porations, whose  stock  is  divided  into  such  small  shares  as  to  admit 
of  easy  distribution,  clears  the  way  for  the  new  era  when  every  self- 
respecting  workman  will  insist  upon  being  an  owner,  and  every  well- 
managed  corporation  will  see  that  its  workmen  are  directly  interested 
in  the  results  of  the  business.  To  effect  this  desirable  end,  no  com- 
pulsory legislation  and  no  addition  to  the  powers  of  corporations  are 
needed. 

"  It  is,  however,  by  no  means  necessary  that  all  workmen  should 
thus  become  shareholders.  There  will  always  be  a  considerable  ele- 
ment of  an  unstable  and  unintelligent  character  whose  participation 
in  the  ownership  is  neither  desirable  nor  possible  ;  but  I  think  the 
time  is  near  when  it  will  be  discreditable  to  a  workman  not  to  be  also 
an  owner  in  the  establishment  in  which  he  works,  and  that  all  work- 
men of  the  better  class  will  have  such  an  interest.  It  is  quite  con- 
ceivable that  the  workmen  may  ultimately  acquire  the  preponderating 
interest,  in  which  case  the  best  possible  solution  will  have  been 
reached,  in  which  labor  hires  capital  at  the  lowest  possible  rate  and 
thus  becomes  the  main  factor  in  the  conduct  of  industry.  "  ^ 

But  in  many  other  instances  the  enterprises  were 
unfortunate  and  ruinous,  and  co-operation  was  not  a 
success. 

' '  Certain  employees  of  the  Philadelphia  &  Reading,  who  a  few 
years  ago  accepted  shares  of  the  company's  stock  in  part  payment  of 
wages,  came  out  at  the  little  end  of  the  horn.  In  Massachusetts 
there  is  a  special  law  permitting  corporations  to  contribute  to  funds 
of  this  kind  and  protecting  all   moneys  thus  paid  in.     Such  a  law  is 

*  See  also  a  work   on  "  Profit-Sharing  "  by  N.  P.  Oilman,  1889. 


REMEDIES   FOR   THE    RAILROAD   PROBLEM.     12/ 

eminently  reasonable  and  should   be  provided   m  cvc-iv  State.      No 
Massachusetts  company  has  as  yet  taken  advantage  of  it,  however."' 

The  Manchester  Textile  Recorder  speaks  of  the 
system  of  profit-sharing  as  merely  the  offering  of  a 
bribe  for  good  behavior.  And  this  undoubtedly  is 
true  of  those  enterprises  wherein  the  capitalist  gives  a 
small  proportion  of  his  profits  to  his  employees.  But 
it  can  hardly  be  said  to  be  true  of  those  enterprises 
in  which  all  of  the  profits  go  to  the  employees ;  in 
other  words,  the  completely  co-operative  enterprises. 

Herbert  Spencer  has  no  faith  in  co-operation,  and 
in  his  article  on  "  The  Coming  Slavery,"  says : 

*•  No  form  of  co-operation,  small  or  great,  can  be  carried  on  with- 
out regulation,  and  an  implied  submission  to  the  regulating  agencies. 
Even  one  of  their  own  organizations  for  effecting  social  changes 
yields  them  proof.  It  is  compelled  to  have  its  councils,  its  local  and 
general  officers,  its  authoritative  leaders,  who  must  be  obeyed  under 
penalty  of  confusion  and  failure.  And  the  experience  of  those  who 
are  loudest  in  their  advocacy  of  a  new  social  order  under  the  paternal 
control  of  a  government,  shows  that  even  in  private  voluntarily- 
formed  societies  the  power  of  the  regulative  organization  becomes 
great,  if  not  irresistible  ;  often,  indeed,  causing  grumbling  and 
restiveness  among  those  controlled.  Trades  Unions  which  carry  on 
a  kind  of  industrial  war  in  defence  of  workers*  interests  versus 
employers'  interests  find  that  subordination  almost  military  in  its 
strictness  is  needful  to  secure  efficient  action  ;  for  divided  councils 
prove  fatal  to  success.  And  even  in  bodies  of  co-operators  formed  for 
carrying  on  manufacturing  or  distributing  business,  and  not  needing 
that  obedience  to  leaders  which  is  required  where  the  aims  are  offen- 
sive or  defensive,  it  is  still  found  that  the  administrative  agency  gains 
such  supremacy  that  there  arise  complaints  about  'the  tyranny  of 
organization.'  Judge  then  what  must  happen  when,  instead  of 
relatively  small  combinations,  to  which  men  may  belong  or  not  as 
they  please  we  have  a  national  combination,  in  which  each  citizen 
finds  himself  incorporated,  and  from  which  he  cannot  separate  him- 

'  Railroad  Gazette  March  22,  1889. 


128  THE   CORPORATION   PROBLEM. 

self  without  leaving  the  country.  Judge  what  must  under  such  con- 
ditions become  the  despotism  of  a  graduated  and  centralized  official- 
ism, holding  in  its  hands  the  resources  of  the  community,  and  having 
behind  it  whatever  amount  of  force  it  finds  requisite  to  carry  out 
its  decrees  and  maintain  what  it  calls  order.  Well  may  Prince 
Bismarck  display  leanings  toward  State-socialism.  .  .  .  The 
final  result  would  be  a  revival  of  despotism.  A  disciplined  army 
of  civil  officials,  like  an  army  of  military  officials,  gives  supreme 
power  to  its  head — a  power  which  has  often  led  to  usurpation,  as 
in  medieval  Europe  and  still  more  in  Japan — nay,  has  thus  so  led 
among  our  neighbors,  within  our  own  times.  .  .  .  That  those 
who  rose  to  power  in  a  socialistic  organization  would  not  scruple  to 
carry  out  their  aims  at  all  costs,  we  have  good  reason  for  concluding. 
.  .  .  It  would  need  but  a  war  with  an  adjacent  society,  or  some 
internal  discontent  demanding  forcible  suppression,  to  at  once  trans- 
form a  socialistic  administration  into  a  grinding  tyranny  like  that  of 
ancient  Peru  :  under  which  the  mass  of  the  people,  controlled  by 
grades  of  officials,  and  leading  lives  that  were  inspected  out-of-doors 
and  in-doors,  labored  for  the  support  of  the  organization  which  regu- 
lated them,  and  were  left  with  but  a  bare  subsistence  for  themselves." 

The  fact  seems  to  be  that  when  an  employee  has 
developed  to  a  point  where  he  is  capable  of  carry- 
ing on  a  co-operative  enterprise,  he  is  capable  of 
rising  above  the  position  of  employee  and  of  be- 
coming an  employer  himself.  The  result  seems  to 
indicate  that  co-operation  and  profit-sharing  may 
ameliorate  the  condition  of  the  weak,  but  that  they 
will  not  to  any  great  extent  take  charge  of  the  in- 
dustries and  railroads  of  America. 

There  is  another  and  very  recent  phase  of  this 
question  which  is  important.  The  railroads  of  the 
country  have  come  to  fear  the  discontent  and  the 
strikes  of  their  employees.  The  bonds  of  sym- 
pathy and  unity  of  interest  between  the  railroad 
owners    and    the    employees    are    few   and    weak. 


REMEDIES    FOR    THK    RAILROAD    PROBLEM.     1 29 

Strikes  occur ;  traffic  is  stopped ;  wages  are  lost ; 
interest  and  dividends  are  not  paid  ;  violence  and 
even  crimes  are  perpetrated.  The  necessity  of  a 
remedy  became  evident  long  ago,  and  in  the  course  of 
time  the  talent  and  ingenuity  of  the  railroads  devised 
a  remedy.  It  was  inaugurated  by  the  Baltimore  & 
Ohio  Railroad  Company  immediately  after  the  Pitts- 
burgh strikes  and  riots  of  1877.  Later  still,  the 
Pennsylvania  road  adopted  the  Baltimore  &  Ohio 
plan  and  improved  upon  it.  Later  still,  after  the 
great  strike  on  the  Chicago,  Burlington,  &  Quincy 
Railroad  in  1888,  the  latter  company  adopted  the 
Pennsylvania  plan.  It  is  substantially  a  plan  of  co- 
operative insurance — the  railroad  company  being 
the  collector  and  disburser  of  the  fund,  and  the 
employees  being  the  persons  paying  assessments 
and  receiving  fixed  sums  in  case  of  injurj^  or  death. 
The  membership  is  entirely  voluntary,  and  any 
member  can  withdraw  at  any  time.  The  company 
defrays  all  operating  expenses,  and  takes  charge  of 
the  funds,  allowing  four  per  cent,  interest.  For  the 
first  six  months  employees  were  to  be  admitted 
without  regard  to  age  or  physical  condition,  except 
that  they  were  to  be  in  sufficiently  good  health  to 
perform  their  duties.  After  that,  none  over  45  years 
old  were  to  be  admitted.  The  dues  vary  from  75 
cents  to  $3.50  a  month,  and  the  benefits  from  50  cents 
to  $2.50  per  day.  The  death  benefits  vary  from  $250 
to  $1,200.  An  employee  injured  in  the  service  does 
not  lose  his  right  to  sue  the  company,  but  if  he  sues 
he  is  not  to  enforce  his  claims  against  the  association. 

The  railroad  has  seven  out  of  the  thirteen  directors  : 
9 


130  THE   CORPORATION   PROBLEM. 

the  employees  the  other  six.  The  employer  performs 
a  distinctly  generous  act  toward  its  employees,  and 
binds  itself  to  keep  it  up  continually.  It  takes  the 
risks  of  the  first  few  years — the  most  difficult  obstacle 
of  mutual-benefit  associations, — and  it  renders  pay- 
ment certain.  It  insures  careful  and  talented  manage- 
ment, and  provides  faithful  and  efficient  officers. 

"  The  whole  scheme  constitutes  a  constant  and  tangible  evidence 
to  the  men  that  they  are  not  working  for  a  wholly  soulless  and  im- 
personal organization  or  machine,  and  thus  it  secures  a  sort  of  fidelity 
that  is  universally  regarded  as  more  valuable  than  that  given  for  mere 
money."  ' 

This  plan  has  succeeded  under  the  management  of 
the  Pennsylvania  Railroad  Company,  and  probably 
will  be  adopted  by  all  of  the  great  railroad  systems 
of  the  country.  And  it  is  a  curious  fact  that  while 
Bismarck  in  Germany  has  been  causing  the  state  to 
insure  the  laboring  classes  against  accident  and  death, 
the  railroads  have  been  doing  a  similar  service  in 
America.  The  effect  probably  will  be  to  make  the 
employee  more  steady  and  more  content  with  his 
lot.  It  will  also  tend  to  increase  the  power  of  the 
railroads  themselves.  Further  than  this  it  will  not 
go.  It  will  not  solve  the  railroad  and  corporation 
problem.^ 

STATE    SOCIALISM    AS    A    REMEDY. 

There  is  a  large  and  growing  class  of  thinkers  who 
believe    that    the    important  industries  of  a  people 

^  Railroad  Gazette,  March  22,  18S9. 

^  Concerning  this  question  of  insurance  funds  and  the  relation  of 
corporations  and  their  employees,  see  also  the  third  annual  report  of 
the  Interstate  Commerce  Commission,  pp.  102-104. 


REMEDIES    FOR    THE    RAILROAD    I'RoBr.KM.      I3I 

should  be  managed  and  carried  on  by  the  govern- 
ment. They  beheve  that  the  railroad,  banking,  in- 
surance, and  in  large  part  the  manufacturing  business 
should  be  carried  on  not  by  private  corporations,  but 
by  the  State.  They  advocate  state  socialism,  and 
believe  that  the  evils  and  dangers  which  no.w  arise 
from  corporations  and  wealth  will  disappear,  if  state 
socialism  prevails.  They  say  that  of  all  the  forces 
which  civilize  a  people,  the  most  potent  one  and 
the  only  one  capable  of  solving  present  difficulties 
is  the  power  of  government. 

The  opposite  school  of  thinkers  do  not  believe  in 
this.  They  say  that  a  nation  is  civilized  and  de- 
veloped, not  by  its  government,  but  by  entirely  dif- 
ferent influences  and  forces, — influences  such  as  the 
printing-press,  with  its  books,  pamphlets  and  publica- 
tions ;  commerce  with  its  interchange  of  merchandise, 
food,  comforts,  and  luxuries  ;  travel,  introducing  new 
ideas  and  disclosing  the  relative  importance  of  men 
and  things  ;  machinery  and  inventions,  decreasing 
hours  of  labor,  increasing  comforts,  cheapening  the 
cost  of  living,  and  enlarging  the  thoughts  of  men ; 
gunpowder,  rendering  war  short,  costly,  and  rare; 
education,  science,  literature,  art,  philosophy,  and 
religion,  —  these  are  the  civilizing  forces  of  the 
world.  This  class  of  thinkers  say  that  govern- 
ment is  not  a  proper  organizer  and  leader,  but  is 
merely  the  protector  of  the  nation  ;  that  at  all  times 
it  is  merely  a  reflection  of  the  character  of  the  peo- 
ple;  that  it  lags  behind  their  growth,  instead  of 
creating  it  ;  that  its  use  is  only  in  protecting  life, 
liberty,   and   property, — a  negative  duty;  and  that 


132  THE   CORPORATION   PROBLEM. 

when  government  goes  outside  of  this  sphere  and 
assumes  the  task  of  directing  and  hastening  the 
development  of  a  people,  then  government  not  only 
becomes  oppressive  and  corrupt,  but  checks  the 
growth  and  deadens  the   vitality  of  the  nation. 

Why  is  it  that  whenever  a  social  difficulty  arises 
or  is  imagined  men  seek  a  remedy  through  govern- 
ment ?  Government  has  been  formed  to  protect 
rights,  not  to  create  them.  And  government  has 
proved  to  be  the  most  incapable  leader  that  civiliza- 
tion has  known.  Its  whole  history  has  been  one  long 
record  of  war,  rapine,  interference,  mistake,  incom- 
petency, and  usurpation.  It  is  the  most  dangerous 
force  that  enters  into  civilization.  It  has  clogged 
and  misdirected  progress  in  numberless  instances, 
and  has  rarely  aided  that  progress.  It  is  one  of 
the  forces  which  makes  a  nation  a  highly  civilized 
people,  but  the  part  that  it  plays  is  subsidiary  and 
small.  Government  is  not  the  power  that  can  solve 
the  problems  of  the  times. 

One  of  the  greatest  thinkers  of  the  age,  in  a 
searching  examination  of  this  question,  has  demon- 
strated that  the  State  is  incompetent  to  do  more 
than  protect  life,  liberty,  and  property.  Herbert 
Spencer,  on  "  The  Man   versus  The  State,"  says : 

"The  Westminster  Review  for  April,  i860,  contained  an  article 
entitled  '  Parliamentary  Reform  ;  the  Dangers  and  the  Safeguards. ' 
In  that  article  I  ventured  to  predict  some  results  of  political  changes 
then  proposed. 

"Reduced  to  its  simplest  expression,  the  thesis  maintained  was 
that,  unless  due  precautions  were  taken,  increase  of  freedom  in  form 
would  be  followed  by  decrease  of  freedom  in  fact.  Nothing  has  oc- 
curred to  alter  the  belief  I  then  expressed.      The  drift  of  legislation 


REMEDIES   FOR   THE    RAILROAD   PROBLEM.     1 33 

since  that  time  has  been  of  the  kind  anticipated.  Dictatorial  meas- 
ures, rapidly  multiplied,  have  tended  continually  to  narrow  the  liber- 
ties of  individuals  ;  and  have  done  this  in  a  double  way.  Regula- 
tions have  been  made  in  yearly-growing  numbers,  restraining  the 
citizen  in  directions  where  his  actions  were  previously  unchecked, 
and  compelling  actions  which  previously  he  might  perform  or  not  as 
he  liked  ;  and  at  the  same  time  heavier  public  burdens,  chiefly  local, 
have  further  restricted  his  freedom,  by  lessening  that  portion  of  his 
earnings  wliich  he  can  spend  as  he  pleases,  and  augmenting  the 
portion  taken  from  him  to  be  spent  as  public  agents  please." 

The  same  author,  in  his  article  on  "  The  Sins  of 
Legislators,  "  says  : 

'*  Government,  begotten  of  aggression  and  by  aggression,  ever 
continues  to  betray  its  original  nature  by  its  aggressiveness  ;  and 
that  which  on  its  nearer  face  seems  beneficence  only,  shows,  on  its 
remoter  face,  not  a  little  maleficence — kindness  at  the  cost  of  cruelty. 
For  is  it  not  cruel  to  increase  the  sufferings  of  the  better  that  the  suf- 
ferings of  the  worse  may  be  decreased  ?  It  is.  indeed,  marvellous 
how  readily  we  let  ourselves  be  deceived  by  words  and  phrases  which 
suggest  one  aspect  of  the  facts  while  leaving  the  opposite  aspect 
unsuggested.  " 

And  also 

"  Perpetually  governments  have  thv/arted  and  deranged  the  growth 
[of  trade]  but  have  in  no  way  furthered  it,  save  by  partially  dischar- 
ging their  proper  function  and  maintaining  social  order.  So,  too, 
with  those  advances  of  knowledge  and  those  improvements  of  ap- 
pliances, by  which  these  structural  changes  and  these  increasing 
acti\'ities  have  been  made  possible.  It  is  not  to  the  State  that  we  owe 
the  multitudinous  useful  inventions  from  the  spade  to  the  telephone  ; 
it  was  not  the  State  which  made  possible  extended  navigation  by  a 
developed  astronomy  ;  it  was  not  the  State  which  made  the  discoveries 
in  physics,  chemistr)',  and  the  rest,  which  guide  modern  manufactures  ; 
it  is  not  the  State  which  devised  the  machinery  for  producing  fabrics 
of  every  kind,  for  transferring  men  and  things  from  place  to  place, 
and  for  ministering  in  a  thousand  ways  to  our  comforts.  The  world- 
wide transactions  conducted  in  merchants'  offices,  the  rush  of  traffic 
filling  our  streets,  the  retail  distributing  system  which  brings  every- 


134  THE   CORPORATION   PROBLEM. 

thing  within  easy  reach  and  delivers  the  necessaries  of  life  daily  at  our 
doors,  are  not  of  governmental  origin.  All  these  are  results  of  the 
spontaneous  activities  of  citizens,  separate  or  grouped.  Nay,  to 
these  spontaneous  activities  governments  owe  the  very  means  of 
performing  their  duties.  Divest  the  political  machinery  of  all  those 
aids  which  Science  and  Art  have  yielded  it — leave  it  with  those  only 
which  State  officials  have  invented,  and  its  functions  would  cease.  " 

Buckle,  the  most  profound  historian  that  ever 
analyzed  the  elements  of  national  greatness,  sum- 
marized his  belief  concerning  government,  as  follows : 

"  Well  may  it  be  said  of  Adam  Smith,  and  said  too  without  fear  of 
contradiction,  that  this  solitary  Scotchman  has,  by  the  publication  of 
one  single  work,  contributed  more  towards  the  happiness  of  man, 
than  has  been  effected  by  the  united  abilities  of  all  the  statesmen  and 
legislators  of  whom  history  has  preserved  an  authentic  account.    .    .    . 

"The  accusation  which  the  historian  is  bound  to  bring  against 
every  government  which  has  hitherto  existed  is,  that  it  has  over- 
stepped its  proper  functions,  and,  at  each  step,  has  done  incalculable 
harm.  .  .  .  To  maintain  order,  to  prevent  the  strong  from  oppress- 
ing the  weak,  and  to  adopt  certain  precautions  respecting  the  public 
health,  are  the  only  services  which  any  government  can  render  to  the 
interests  of  civilization.  That  these  are  services  of  immense  value, 
no  one  will  deny  ;  but  it  cannot  be  said  that  by  them  civilization  is 
advanced,  or  the  progress  of  man  accelerated.  All  that  is  done  is,  to 
afford  the  opportunity  of  progress  ;  the  progress  itself  must  depend 
upon  other  motives. 

"  In  France,  as  in  every  other  country  where  the  protective  prin- 
ciple is  active,  the  government  has  established  a  monopoly  of  the 
worst  kind  ;  a  monopoly  which  comes  home  to  the  business  and 
bosoms  of  men,  follows  them  in  their  daily  avocations,  troubles  them 
with  its  petty,  meddling  spirit,  and,  what  is  worse  than  all,  diminishes 
their  responsibility  to  themselves  ;  thus  depriving  them  of  what  is  the 
only  real  education  that  most  minds  receive — the  constant  necessity 
of  providing  for  future  contingencies,  and  the  habit  of  grappling  with 
the  difficulties  of  life. 

"  The  consequence  of  all  this  has  been,  that  the  French,  though  a 
great  and  splendid  people,  a  people  full  of  me: tie,  high-spirited, 
abounding  in  knowledge,  and  perhaps  less  oppressed  by  superstition 


REMEDIES    For    THF.    KAIIKoaD    rRrtp.T.FXf.      I  ;^5 

than  any  other  in  Europe — have  always  been  founci  unfit  to  exercise 
political  power.  .  .  .  Men  can  never  be  free  unless  they  are  edu- 
cated to  freedom.  And  this  is  not  the  eilucation  which  is  to  be  found 
in  schools,  or  gained  from  books  ;  but  it  is  that  w  hich  consists  in 
self-tliscipline,  in  self-reliance,  and  in  self-government.  .  .  .  The 
old  associations  of  the  French  all  jioint  in  another  direction.  At  the 
slightest  difficulty  they  call  on  the  government  for  support.  What 
with  us  is  competition,  with  them  is  monopoly.  That  which  we 
effect  by  private  companies  they  effect  by  public  boards.  They 
cannot  cut  a  canal,  or  lay  down  a  railroad,  without  appealing  to  the 
government  for  aid.  \Vith  them  the  people  look  to  the  rulers  ;  with 
us  the  rulers  look  to  the  people.  With  them  the  executive  is  the 
centre  from  which  society  radiates.  With  us  society  is  the  instigator, 
and  the  executive  the  organ.  The  difference  in  the  result  has  corre- 
sponded with  the  difference  in  the  process.  We  have  been  made  fit 
for  political  power  by  the  long  exercise  of  civil  rights.  They, 
neglecting  the  exercise,  think  they  can  at  once  begin  with  the  power. 
We  have  always  shown  a  determination  to  uphold  our  liberties,  and, 
when  the  times  are  fitting,  to  increase  them  ;  and  this  we  have  done 
with  a  decency  and  a  gravity  natural  to  men  to  whom  such  subjects 
have  long  been  familiar.  But  the  French,  always  treated  as  children, 
are,  in  political  matters,  children  still.  And  as  they  have  handled 
the  most  weighty  concerns  in  that  gay  and  volatile  spirit  which  adorns 
their  lighter  literature,  it  is  no  wonder  that  they  have  failed  in  mat- 
ters where  the  first  condition  of  success  is,  that  men  should  have  been 
long  accustomed  to  rely  upon  their  own  energies,  and  that  before 
they  try  their  skill  in  a  political  struggle,  their  resources  should  have 
been  sharpened  by  that  preliminary  discipline,  which  a  contest  with 
the  difficulties  of  a  civil  life  can  never  fail  to  impart."  ' 

At  the  present  time  Germany  represents  the  ten- 
dency towards  state  sociaHsm.  In  Germany  the 
Reichstag  has  recently  passed  the  third  of  a  series 
of  measures  which  lead  up  to  state  socialism  in  a 
comprehensive  and  radical  way.  By  these  measures 
the   state    insures   all    employees   in    the    kingdom 

'Buckle's  "History  of  Civilization  in  England,"  pp.  155,  203, 
453.  454. 


136       THE  CORPORATION  PROBLEM. 

against  accident,  sickness,  disablement,  old  age,  and 
death  ;  the  insurance  is  compulsory,  and  the  cost  is 
collected  from  the  employers  and  employees. 

"  It  may  be  as  well  to  recall  the  chief  stages  in  the  social  legisla- 
tion of  the  last  eight  years.  The  first  installment,  a  measure  of 
insurance  against  sickness,  became  law  in  1883.  In  return  for  a  pay- 
ment of  not  more  than  ij^  to  2  per  cent,  of  the  normal  local  wage, 
as  ascertained  by  the  civil  authority  in  consultation  with  the  officers 
of  the  commune,  medical  attendance,  medicine,  and  medical  appli- 
ances are  supplied  for  the  insured  in  case  of  sickness.  The  patient 
receives  during  the  period  of  sickness  (not  more  than  thirteen  weeks) 
one  half  of  the  normal  local  wage.  If  it  be  necessary  to  remove  him 
to  a  hospital,"  his  immediate  dependents  (if  any)  receive  one  half  of 
his  allowance.  Insurance  is  compulsory,  but  is  not  yet  extended  to 
agriculture,  forestry,  commercial  employees,  or  to  domestic  servants. 
Contributions  are  made  through  the  employers,  who  themselves  pay 
one  third  of  the  amount.  Self-government  in  independent  local 
unions  (averaging  about  six  hundred  members)  is  the  rule.  Workmen 
and  employers  are  represented  on  the  boards  in  the  proportion  of  two 
to  one. 

"  After  several  fruitless  attempts,  the  first  installment  of  the  law 
for  forced  insurance  against  accidents  passed  the  Reichstag  on  June 
27,  1884.  It  began  with  trades  exposed  to  especial  risk,  and  has 
since  been  extended  to  the  building  trades,  to  agriculture,  and  to 
sailors  of  the  inland  and  maritime  traffic.  The  measure  still  awaits 
its  extension  to  those  engaged  in  smaller  industries  and  to  domestic 
servants  in  the  towns.  The  whole  body  of  industries  and  trades  is 
divided  into  trade  associations.  With  a  view  to  equitable  mutual  in- 
surance those  trades  are  combined  which  offer  an  equal  degree  of 
risk.  In  1886  there  were  sixty-four  such,  comprising  between  3,000,- 
000  and  4,000,000  workers.  Payments  are  made  by  the  masters  in 
proportion  to  the  number  and  average  wage  of  their  men  and  to  the 
risks  of  their  industry.  In  1888,  independently  of  the  contributions 
to  the  reserve  fund,  the  payments  in  compensation  reached  four  per 
mille  of  the  total  wage,  while  the  expenses  of  administration 
amounted  to  one  per  mille.  The  total  annual  expenditure  will  ulti- 
mately reach  a  much  higher  figure. 

"  But  the  advantages  are  considerable.    For  complete  disablement, 


REMEDIES    FOR    THE    RAILR(^AD    PROBLEM.     1 37 

two  thirds  of  the  actual  wage  (if  exceeding  four  marks,  a  diminishing 
fraction) ;  for  partial  disablement,  an  equitable  proportion  of  the 
same  is  granted  as  pension.  In  case  of  death  by  accident,  twenty 
days'  wage  is  given  as  burial  money,  and  an  allowance  to  the  widow 
of  20  per  cent,  of  the  wages  of  the  deceased,  with  15  per  cent, 
to  each  child  under  fifteen  years — the  whole  not  to  exceed  60  per  cent. 
Dependent  ascendants  have  also  a  secondary  claim.  If  the  injured 
man  is  removed  to  a  hospital,  the  wife  draws  her  allowance  as  in  the 
case  of  death.  The  masters  who  supply  the  funds  also  conduct  the 
administration,  but  representatives  of  the  workers  sit  on  the  Board  of 
Central  Control  and  act  as  assessors  to  the  arbitration  courts.  Elimi- 
nation of  risk  is  directly  encouraged  by  self-interest  and  mutual 
supervision,  and  necessary'  measures  of  prevention  can  be  defrayed 
from  the  common  purse. 

"  Such  are  the  chief  provisions  of  these  two  complicated  acts.  The 
former  is  considered  successful  ;  the  latter  can  hardly  yet  be  finally 
judged,  though  it  is  expensive  in  working,  and  its  growing  burden  is 
regarded  with  some  anxiety.  But  the  measure  now  sanctioned  is  of 
quite  a  different  character.  In  its  scope  are  included  almost  without 
exception  all  persons  above  the  age  of  sixteen,  male  and  female, 
working  in  a  dependent  position  for  regular  hire.  The  line  between 
dependent  and  independent  workers  is  not  always  clearly  marked  ; 
so  a  certain  discretion  is  allowed  to  the  Federal  Council  to  admit,  in 
particular  trades,  by  special  order,  sub-contractors  for  large  firms, 
and  even  independent  workers  not  themselves  employing  workmen. 
Existing  state  and  communal  arrangements  for  similar  purposes  are 
respected,  stipulation  being  made  that  equal  advantages  shall  be 
granted.  The  contribution  offered  by  the  State  is  secured  for  such 
establishments  when  they  have  obtained  the  approval  of  the  Federal 
Council.  Eleven  millions  of  persons  will  at  once  come  under  the 
compulsion  of  the  act  when  its  operation  begins  (probably  in  1891). 
The  capital  value  of  the  obligations  incurred  directly  by  the  State  by 
this  connection  is  reckoned  at  77.8  million  pounds  ;  the  total  obliga- 
tions will  hardly  be  less  than  three  times  as  much."  ' 

This  sweeping  and  far-reaching  poHcy  of  the  Ger- 
man Empire  is  an  outgrowth  of  the  German  tendency 
toward   the  paternal  system  of  government.     It    is 

*  London  Times'  Berlin  Correspondence. 


138  THE    CORPORATION    PROBLEM. 

intended  as  a  check  to  nihilism.  It  seeks  to  bind 
the  masses  to  the  support  of  the  government,  and  it 
is  a  long  stride  toward  a  state  socialism  which  will 
not  only  embrace  the  railroads,  but  will  include  most 
of  those  enterprises  which  in  other  countries  are 
carried  on  by  private  corporations. 

"  Every  one  is  familiar  to  a  greater  or  less  degree  with  the  extent  to 
which  the  European  nations  have  ventured  in  the  direction  of  pater- 
nalism. It  is  known  that  they  are  common  carriers,  stationers,  and 
printers,  that  they  run  theatres,  public  markets,  and  slaughter-houses, 
edit  and  print  newspapers,  transmit  messages,  keep  lodging-houses, 
own  warehouses  and  race-tracks,  are  pawn-brokers,  manage  express 
companies,  and  so  on  ;  but  perhaps  it  is  not  so  well  known  that  in 
addition  they  teach  stammerers,  work  coal  mines,  peat-bogs,  smelting 
houses,  and  iron  mines,  hire  out  hearses  and  horses,  have  lime  quar- 
ries, run  apothecary  shops,  vineyards,  and  wine  cellars,  and  manufac- 
ture china,  tapestry,  tobacco,  and  matches.  Many  of  these  industries 
they  are  obliged  to  carry  on  as  a  direct  consequence  of  the  mere  fact 
of  administration  ;  and  others,  the  more  important  class,  are  prompted 
in  their  conception  evidently  by  the  belief  that  it  will  not  do  to 
intrust  to  interested  private  action  the  management  of  an  industry 
which  entails  important  public  responsibilities."^ 

Mr.  Bellamy  in  his  novel,  ''  Looking  Backward," 
draws  an  ideal  picture  of  state  socialism.  Indeed, 
ever  since  Sir  Thomas  More's  ''  Utopia,"  written  in 
the  sixteenth  century,  these  ideal  communities  have 
been  the  subject  of  many  books.  Mr.  Bellamy, 
however,  brings  forward  the  idea  that  the  modern 
corporation  is  to  be  the  highway  along  which 
America  is  to  travel  into  state  socialism.  But  when 
it  is  considered  that  ever  since  Sir  Thomas  More's 
time  the  functions  of  government  have  been  steadily 
decreasing,  it  hardly  seems  probable  that  government 

^  N.    Y.  Record  and  Guide,  July  13,  1889. 


RFMKDIKS    FOR    THE    RAILROAD    PROBLEM.      1 39 

is  to  be  the  agent  that  will  remedy  the  social  woes 
of  modern  times.  Indeed,  German  state  socialism 
has  not  yet  affected  other  nations.  It  will,  even  at 
the  present  rate  of  progress,  be  ages  before  the  so- 
cialists can  in  Germany  or  any  other  country  set  up 
a  legislature  strong  enough  to  put  the  state  in  pos- 
session of  the  industries  of  the  country.  The 
socialists  will  win  many  \'ictories  so  long  as  the 
owners  of  property  are  not  seriously  alarmed.  But 
the  rights  of  property  are  deeply  rooted  in  human 
nature  and  human  society,  and  the  socialists  will 
be  astonished  to  find  what  a  resistance  property  is 
capable  of  when  these  attacks  are  made  upon  it. 

The  traditions  and  settled  policy  of  the  Anglo- 
Saxon  nations  are  opposed  to  this  theory  of  govern- 
ment. England  and  America  have  relaxed  somewhat 
from  the  principle  of  no  interference  by  the  state 
with  business,  but  England  and  America  still  believe 
that  such  interference  is  disastrous,  unwise,  and  de- 
moralizing both  to  the  government  and  to  the 
governed.  They  believe  that  self-reliance  and  inde- 
pendence— the  safeguards  and  guaranties  of  liberty 
and  progress — are  undermined  by  state  socialism. 
They  are  aware  that  government  may  temporarily 
bring  about  splendid  and  imposing  results,  but  those 
results  are  artificial  in  their  origin,  ephemeral  in  their 
nature,  and  deadening  in  their  effects  upon  the 
growth  of  a  people.  The  evolution  of  a  higher,  a 
different  and  more  durable  civilization  will  never 
come  through  the  instrumentality  of  government. 
Government  creates  nothing  new.  It  burnishes  up 
the  armor  of  the  past.     Great  thoughts,  great  solu- 


I40  THE    CORPORATION    PROBLEM. 

tions  of  social  problems,  and  great  development  of 
the  nations  of  the  earth  are  evolved,  not  by  govern- 
ment, but  by  the  creative  and  spontaneous  genius  of 
the  people — the  people  untrammelled  and  free  to 
follow  the  course  designated  by  nature. 

STATE    OWNERSHIP    OF    RAILROADS    AS    A    REMEDY. 

The  State  must  rule  the  railroads  or  the  railroads 
will  rule  the  state.  This  is  the  conclusion  to  which 
a  certain  school  of  thinkers  in  Europe  and  America 
has  come. 

In  Continental  Europe  this  belief  has  led  to  a 
greater  or  less  state  ownership  of  railroads.  In 
England  and  America  the  same  belief  has  led  to 
a  governmental  regulation  of  railroads. 

All  civilized  nations  have  felt  the  necessity  of 
dealing  radically  with  this  newly  risen  power — the 
railroad.  For  nearly  fifty  years  remedy  after  remedy 
has  been  tried.  Each  nation  has  fluctuated  in  its 
policy,  but  has  worked  towards  some  end  which 
accords  best  with  its  institutions  and  people.  For 
the  most  part  there  has  been  a  blind  groping  in  the 
dark.  Even  yet  the  policy  of  some  of  the  nations 
is  vacillating  and  full  of  doubt.  But  experiments 
have  been  tried  on  a  gigantic  scale,  and  the  endeav- 
ors of  Europe  to  solve  the  railway  problem  are  full 
of  instruction  for  all  the  world. 

In  France  in  1842,  railroads  were  built  at  the  joint 
expense  of  the  government  and  private  persons. 
They  were  then  turned  over  to  the  corporations 
to  be  operated,  but  to  be  returned  to  the  state  as 
the  property  of   the  state,  at  the  end  of   a  period 


REMEDIES    FOR    TlIK    KA1LR(»AI)    PROBLEM.      I4I 

of  time,  averaging  thirty-six  years.  The  revolution 
of  1848,  and  the  advent  of  Napoleon  in  1851  changed 
the  policy  of  the  government,  and  the  reversion  of 
the  railroads  to  the  state  was  extended  to  ninety- 
nine  years.  In  1859  the  state  assumed  greater 
control.  It  furnished  the  greater  part  of  the  funds, 
and  guarantied  the  bonds.  The  state  assumed  the 
regulation  of  rates,  but  allowed  the  corporations  to 
earn  interest,  declare  reasonable  dividends,  and  ac- 
cumulate a  sinking  fund  to  pay  stockholders  when 
the  time  came  for  the  railroads  to  revert  to  the  state. 
In  1865  the  state  began  constructing  new  lines  at  its 
own  expense,  owing  to  the  impossibility  of  inducing 
capitalists  to  undertake  the  work  on  the  terms 
offered.  The  six  great  lines  radiating  from  Paris, 
which  then  operated  the  railroads  of  France,  had 
refused  to  construct  the  desired  new  lines.  In  1883 
the  financial  embarrassments  of  the  government 
forced  it  to  surrender  to  the  old  railroads  ;  the  new 
lines  were  turned  over  to  them  ;  the  government 
agreed  not  to  construct  more  lines,  but  to  aid  the 
old  companies  in  such  construction  ;  the  state  gave 
up  its  right  to  all  the  railroads  at  the  end  of  ninety- 
nine  years,  and  the  railroads  agreed  to  repay  gradu- 
ally the  moneys  advanced  by  the  state.  The  state 
retained  the  right  to  regulate  railroad  rates.  Such 
is  the  situation  to-day. 

In  Prussia  in  1837  the  railroad  policy  was  inaugu- 
rated of  chartering  private  corporations  to  build  rail- 
roads, but  le\'ying  a  state  tax  of  a  moderate  amount 
on  the  profits,  and  this  tax  was  to  be  used  by  the 
state  to  purchase  the  stock  of  the   railroads.     The 


142        THE  CORPORATION  PROBLEM. 

state  reserved  the  right  to  purchase  the  railroads  at 
any  time  after  thirty  years  from  the  time  of  con- 
struction, at  a  price  twenty-five  times  greater  than 
the  average  dividend  for  five  years  prior  to  the 
purchase,  the  state  assuming  the  corporate  debts. 
Under  these  terms  few  railroads  were  built,  until  the 
state  guarantied  the  capital  required.  Many  lines 
however  were  constructed  by  the  state  itself.  Bis- 
marck, after  the  war  of  1870,  inaugurated  the  policy 
of  complete  state  ownership  of  railroads,  and  to-day 
Prussia  owns  practically  all  of  the  railroads  within 
its  boundaries.  The  paternal  system  of  government 
and  the  perpetual  preparation  for  war  in  Prussia 
have  determined  its  policy  towards  the  railroads. 

In  Italy,  up  to  1875,  the  railroads  were  built  and 
owned  by  private  corporations,  aided  by  state  grants 
and  guaranties.  In  1875  the  state  purchased  the 
lines.  In  1879  i^  began  the  construction  of  addi- 
tional roads.  But  in  1885  the  difficulties  of  state 
ownership  and  the  desire  for  money  on  the  part 
of  the  state  brought  about  a  change  of  policy. 
The  railroads  were  leased  to  private  corporations 
for  sixty  years,  with  the  privilege  to  the  state  to 
terminate  the  leases  at  the  end  of  twenty  or  forty 
years.  The  rolling  stock  was  sold  to  the  companies 
for  cash,  but  the  state  agreed  to  pay  interest  on 
this  cash,  and  the  state  is  to  do  certain  repairing 
and  improving. 

In  Austria  the  state  owns  part  of  the  railroads, 
and  is  constantly  building  new  ones.  Part  of  the 
railroads  are  owned  by  private  corporations,  which, 
however,  are  subject  to  governmental  control. 


REMEDIES   FOR   THE    RAILROAD    PROBLEM.     I43 

In  Bcknum  the  state  owns  about  three  fourths  of 
the  railroads,  and  is  constantly  acquiring'  the  lines 
owned  by  priv^ate  companies. 

In  Holland  the  state  built  the  railroads  and  leased 
them  to  private  corporations. 

In  Hungary  in  1867,  out  of  1,418  miles  of  railroad, 
only  /S  belonged  to  the  state.  In  1887,  out  of 
6,293  miles  of  railroad,  2,746  miles  were  owned  by 
the  state,  and  925  miles  were  guarantied  by  it.  1  he 
government  within  twenty  years  has  expended 
$95,000,000  on  the  railroads,  and  the  state  roads 
earn  about  3.93  per  cent,  on  their  cost. 

In  Australia  the  railroads  were  built  and  are  still 
owned  and  operated  by  the  state.' 

It  will  be  seen  that  the  tendency  of  Continental 
Europe  is  towards  state  ownership  of  railroads. 
The  incentives  which  have  led  to  this  result  have 
been  not  only  to  do  away  with  the  abuses  which  are 
incident  to  private  ownership,  but  also  to  centralize 
and  increase  the  power  of  the  government,  and  to 
build  roads  which  private  enterprise  would  not  build. 

In  England,  on  the  other  hand,  for  fifty  years  there 
have  been  investigations,  discussions,  and  legislation 
in  the  attempt  to  solve  the  railroad  problem.  The 
first  policy  adopted  was  to  allow  corporations  to 
construct  and  own  the  track,  but  to  allow  all  persons 
to  own  and  run  cars  over  the  track  for  a  compensa- 


'  See  the  report  (January,  1887),  of  Simon  Sterne  as  Commissioner 
of  the  Federal  Government,  to  investigate  the  relations  of  the  gov- 
ernments of  Western  Europe  to  the  railway  systems  within  their 
jurisdiction.  See  also  on  this  subject,  Hadley  r.n  "  Railroad  Trans- 
portation," chapters  viii.,  ix.,  x. ,  xi.,  xii. 


144  THE    CORPORATION    PROBLEM. 

tion,  the  maximum  amount  of  which  was  specified  in 
the  charter.  A  few  years,  however,  demonstrated 
that  it  was  impracticable  to  allow  any  and  all  persons 
to  run  their  own  cars  over  the  line,  and  it  was  found 
also  that  the  maximum  rates  of  charges  were  crude, 
unmanageable,  and  excessive. 

In  1845-46  came  the  financial  panic  and  crash, 
due  to  the  craze  for  railroad  building.  In  1854  an 
act  was  passed  prohibiting  all  unjust  discriminations. 
In  1863  trafific  agreements  and  consolidations  be- 
tween railways  were  prohibited,  except  such  as  were 
approved  by  the  Board  of  Trade,  an  official  body. 
In  1867  the  railroads  were  required  to  publish  their 
rates,  and  statutes  were  enacted  regulating  the  keep- 
ing of  their  accounts.  In  1873  ^^e  act  still  further 
regulating  railroads  and  creating  a  Railroad  Com- 
mission was  passed.  And  in  1888  the  Railway  and 
Canal  Traffic  act  was  enacted,  whereby  the  policy 
of  state  regulation  of  railroads  was  completely  car- 
ried out.  The  English  policy  has  become  a  settled 
and  distinct  one.  It  is  neither  the  policy  of  state 
ownership  on  the  one  hand,  nor  of  total  separation 
of  railroad  and  state  on  the  other.  It  is  the  policy 
of  governmental  regulation  of  railroad  abuses. 

In  America  the  question  whether  the  States  should 
own  the  railroads  arose  early  in  the  history  of  the 
railroads.  A  very  few  years,  however,  demonstrated 
that  state  ownership  of  railroads  was  not  desirable, 
and  there  are  now  very  few  a-dvocates  of  the  idea  that 
each  State  should  own  the  railroads  within  its  juris- 
diction.    The  experiment  has  proven  to  be  a  failure. 

Professor  Adams  says : 


REMEDIES   FOR   THE    RAILROAD    PROBLEM.     I45 

"  Michigan  was  admitted  into  the  Union  in  January,  1837,  and  it 
might  be  imagined,  from  the  proceedings  of  her  early  legislatures, 
that  the  purpose  for  which  she  sought  the  privileges  of  a  State  was 
to  build  canals,  railroads,  and  turnpikes,  and  to  improve  rivers  and 
harbors.  The  legislature,  in  its  first  session,  appointed  a  Board  of 
Commissioners  on  Internal  Improvements,  and  directed  them  to  take 
the  necessary  measures  for  executing  the  following  i)ublic  works  : 
They  were  to  survey  three  lines  of  railroads  across  the  State — called, 
respectively,  the  Southern,  the  Middle,  and  the  Northern  routes,  and 
one  shorter  road,  called  the  Havre  Branch  Railroad.  They  were  also 
to  undertake  three  important  canals — the  Clinton  and  Kalamazoo, 
the  Saginaw  or  Northern,  and  a  canal  about  the  St.  Mary's  River. 
In  addition  to  this  the  Grand,  the  Kalamazoo,  and  the  St.  Joseph 
rivers  were  to  be  improved.  The  total  extent  of  these  works,  entered 
upon  by  the  first  legislature,  amounted  to  1,100  miles  of  highway,  of 
which  557  miles  were  to  be  railroads,  231  canals,  and  321  improve- 
ments of  rivers.  The  population  of  the  newly  admitted  State  was  at 
this  time  175,000.  from  which  it  appears  that  the  legislature  projected 
one  mile  of  improvement  for  every  150  of  the  inhabitants."  ' 

But  during  the  past  ten  years  a  vigorous  advocacy 
of  federal  ownership  of  railroads  has  sprung  up.  The 
United  States  Government  is  being  called  upon  to 
purchase  and  operate  all  the  railroads  of  the  country. 
The  advocates  of  such  ownership  are  not  the  masses 

■  See  Adams  on  "  Public  Debts,"  pp.  325,  326. 

Between  1830  and  1840  several  States  undertook  to  construct  rail- 
ways on  their  own  account,  but  most  of  these  attempts  ended  in  dis- 
aster, and  the  railways  were  completed  by  companies,  if  completed 
at  all.  There  remain,  however,  two  State  railways,  one  138  miles 
long,  owned  by  Georgia,  which  it  leases  to  a  corporation  for  working, 
and  the  other  by  Massachusetts,  the  latter  railroad  being  mostly  in 
the  long  Hoosac  tunnel.  The  Massachusetts  railroads  are  run  under 
charters,  which  give  to  the  legislature  the  right  to  purchase  the  roads 
for  the  State,  by  paying  therefor  the  full  cost  with  such  sum  as,  with 
the  profits  which  shall  have  been  received,  will  be  equal  to  ten  per 
cent,  per  annum  on  the  said  cost.  There  is  little  or  no  inclination, 
however,  to  exercise  this  right  of  purchase. 
10 


146  TPIE   CORPORATION   PROBLEM. 

of  the  people,  nor  the  poHtical  parties,  but  are  some 
of  the  leading  thinkers  of  the  times.  And  their 
cause  seems  to  be  growing.  The  railroads  themselves 
seem  not  to  be  averse  to  a  profitable  sale  to  the  gov- 
ernment. America  is  yet  far  distant  from  federal 
ownership  of  railroads,  but  all  the  arguments  for 
such  ownership  are  now  being  brought  into  promi- 
nence. The  arguments  for  and  against  State  owner- 
ship of  railroads  have  been  stated  and  restated  many 
times  over.  They  are  presented  in  the  following 
pages  at  some  length. 

The  most  remarkable  advocacy  of  federal  owner- 
ship of  railroads  has  been  that  of  the  president  of 
the  Chicago  &  Alton  Railroad  in  his  report  of  Feb- 
ruary, 1890. 

The  report  reads : 

"  It  is  said  that  we  should  not  complain  unless  prepared  to  suggest 
a  remedy.  We  will  therefore  suggest  the  ownership  of  railroads  by 
the  National  Government  and  the  organization  of  a  corps  of  railroad 
operators,  who  shall  remain  in  the  service  during  good  behavior,  and 
be  in  no  greater  degree  under  the  influence  of  politicians  or  political 
parties  than  the  army  militant." 

Briefly  stated.  President  Blackstone's  suggestions 
are  that  the  National  Government  should  acquire 
the  ownership  of  all  the  railroads  in  the  United 
States  now  used  for  interstate  traffic,  by  the  exercise 
of  its  right  of  eminent  domain  or  by  purchase,  pay- 
ment being  made  by  an  issue  of  government  bonds, 
bearing  interest  at  a  rate  not  exceeding  three  per 
cent,  per  annum;  the  bonds  to  be  redeemed  by 
the  annual  application  of  a  sinking  fund  equal  in 
amount  to  one    per  cent,  of  the  whole  amount  of 


REMEDIES   FOR   THE    RAILROAD    PROBLEM.     147 

such  bonds  issued  ;  the  annual  interest  and  sinking 
fund  to  be  paid  from  the  net  earnings  of  the  rail- 
roads, and  the  rates  for  transportation  from  year  to 
year  to  be  reduced  so  as  to  provide  no  more  money 
than  shall  be  needed  for  such  payments.  It  is  need- 
less to  say  that  this  plan  has  not  been  favorably 
received. 

Professor  Hadley  thus  sums  up  the  arguments /r^? 
and  con  in  regard  to  state  ownership  of  railroads. 

**  The  arguments  advanced  by  the  advocates  of  government  owner- 
ship start  from  the  idea  that  government  means  of  transportation  will 
be  managed,  not  with  a  view  to  high  profits,  but  for  the  good  of  the 
community.  They  will  thus,  it  is  said,  offer  low  rates,  based  upon 
cost  of  service,  and  equal  facilities  without  discrimination.  The 
evils  of  speculation  will  be  avoided.  There  will  be  no  waste  of 
capital,  no  construction  of  two  lines  where  but  one  is  needed.  Capi- 
tal will  be  put  where  it  will  do  the  most  good  for  the  development  of 
the  country.  Finally,  we  shall  no  longer  be  at  the  mercy  of  combi- 
nations of  capitalists  who  manipulate  and  tax  us  for  their  own  inter- 
ests. It  is  further  urged  that  the  post-office  shows  how  government 
ccured  to  all  men  low  rates,  equal  facilities,  and  security  against  ex- 
lurtion  ;  and  it  is  claimed  that  the  same  result  might  be  secured  with 
a  government  telegraph,  or  perhaps  with  government  railroads. 

"  On  the  other  hand,  the  Italian  Commission  sums  up  the  arguments 
on  the  other  side  by  saying,  first,  that  it  is  a  mistake  to  expect  lower 
rates  or  better  facilities  from  government  than  from  private  com- 
panies. The  actual  results  are  just  the  reverse.  The  state  is  more 
apt  to  tax  industry  than  to  foster  it  ;  and  when  it  attempts  to  tax  in- 
dustr}-,  it  is  even  less  responsible  than  a  private  company.  Second, 
state  management  is  more  costly  than  private  management,  and  a 
great  deal  of  capital  is  thus  wasted.  Third,  political  considerations 
are  brought  into  a  system  of  state  management  in  a  way  which  is 
disastrous  to  legitimate  business  and  demoralizing  to  politics."  ' 

'  Hadley  on  *'  Railroad  Transportation,"  pp.  252,  253. 
For  a  still  further  argument  against  state  ownership  of  railroads  by 
Professor  Hadley,  see  Atlantic  Monthly,  March,  1891,  p.  388. 


148  THE   CORPORATION    PROBLEM. 

Sir.  R.  Hill,  in  the  report  of  the  English  Royal 
Commission  on  Railways,  1867,  gave  the  following 
among  other  reasons  why  railways  should  belong  to 
the  government. 

(i)  That  the  formation  of  competing  lines,  while 
not  producing,  but  rather  preventing,  permanent  re- 
duction of  rates,  has  grievously  injured  the  interests 
of  existing  companies,  and  tended  to  check  the  use- 
ful extension  of  lines  and  other  improvements. 

(2)  That  railways,  being  shown  by  experience  to 
be  essentially  monopolies,  cannot  be  advantageously 
left  to  independent  companies,  but  should  be  in  the 
hands  of  those  who  are  charged  with  the  interests  of 
the  country  at  large,  viz.:  the  government. 

(3)  That,  nevertheless,  government  should  not  it- 
self attempt  the  immediate  management  of  the  lines, 
but  should  lease  them  to  companies  or  individuals, 
though  retaining  the  power  to  enforce  the  observance 
of  all  regulations  necessary  for  public  safety  and  con- 
venience. 

(4)  That  the  state  should,  therefore,  gradually  pur- 
chase the  whole  railway  system,  with  the  exception, 
perhaps,  of  a  few  lines,  on  terms  to  be  agreed  upon 
with  the  several  companies. 

(5)  That  such  purchase  does  not  necessarily  in- 
volve any  outlay  on  the  part  of  government,  seeing 
that  the  transfer  maybe  made  on  such  arrangements 
as  are  generally  adopted  when  a  line  is  transferred 
from  one  company  to  another,  so  that  no  increase  of 
the  national  debt  is  implied. 

(6)  That,  while  the  rent  demanded  for  a  line  must 
be  sufificient  to  cover  the  payments  by  government 


REMEDIES    FOR   THE   RAILROAD    PROBLEM.     I49 

in  dividends,  interest,  etc.,  to  the  previous  owners, 
preference  amongst  competent  applicants  should  be 
given  to  the  one  who  offers  to  adopt  the  lowest 
traffic  charges. 

(7)  That  government  purchase  of  railways  may  be 
expected  to  secure  the  following  advantages,  viz.: 

(a)  A  pecuniary  gain  to  the  state. 

{b)  Again  to  shareholders  and  others  in  steadiness 
and  security  of  income. 

ic)  Security  against  parliamentary  contests,  now 
so  costly. 

{d)  A  reduction  (eventually  large)  in  fares,  freights, 
etc. 

{e)  Greater  efficiency  of  management. 

(/)  Increase  of  postal  facilities.' 

The  Royal  Commission  of  1867,  however,  denied 
the  soundness  of  most  of  these  claims,  and  reported 
that  it  would  be  difficult  to  find  lessees  who  would 
run  the  railroads  on  the  terms  that  would  be  offered; 
that  the  low  interest  at  which  the  government  could 
borrow  money  would  be  more  than  offset  by  the 
large  price  which  it  must  pay  in  order  to  buy  out 
the  railroads  ;  and  that  the  huge  government  loan 
could  not  be  floated  at  low  rates. 

Charles  Francis  Adams  has  said  : 

"  Because  in  the  countries  of  Continental  Europe  the  state  can  and 
does  hold  close  relations,  amounting  even  to  ownership,  with  the  rail- 
roads, it  does  not  follow  that  the  same  course  could  be  successfully 
pursued  in  England  or  in  America.  The  former  nations  are  by 
political  habit  administrative,  the  latter  are  parliamentary  ;  in  other 
words,  France  and  Germany  are  essentially  executive  in  their  gov- 


'  Jeans  on  "  Railway  Problems,"  p.  458. 


150       THE  CORPORATION  PROBLEM. 

ernmental  systems,  while  England  and  America  are  legislative.  Now 
the  executive  may  design,  construct,  or  operate  a  railroad  ;  the  legis- 
lative never  can."  ^ 

And  Edward  Everett  Hale  has  said  : 

' '  A  railway  stoppage  for  a  fortnight  would  almost  mean  famine  in 
most  Massachusetts  towns,  so  steady  is  the  daily  river  of  food  by  which 
God  now  answers  our  prayers  for  daily  bread.  Now,  as  soon  as  the 
tendency  which  has  brought  out  this  state  of  things  comes  so  far 
that  the  railroad  sers-ice  is  needed  by  one  man  about  as  much  as  by 
another,  so  soon  will  the  government  take  the  railroads.  In  my  judg- 
ment it  ought  to.  But  whatever  be  the  judgment  of  any  individuals, 
what  is  certain  is,  that  it  will. 

"  '  It  will  make  a  very  bad  mess  of  it,'  says  some  grumpy  cynic, 
who  has  no  faith  in  the  people,  curses  trial  by  jury,  and  hates  uni- 
versal suffrage.      '  A  mere  put-up  job  it  will  be — all  along.'  " 

"  I  do  not  see  that,  and  I  do  not  believe  it. 

"On  the  other  hand,  certain  facts  must  be  noted. 

"Thus,  I.  The  administration  of  the  post-office,  by  the  United 
States  Government,  is  the  wonder  and  despair  of  the  rest  of  the  world. 
Read  any  study  on  '  Administration '  by  a  French  expert,  and  see 
what  he  will  say. 

"2.  The  experiment  of  the  success  and  the  honesty  of  the  '  Receiv- 
ers '  who  are  now  doing  this  very  thing,  under  infinite  difficulties, 
speak  a  gi-eat  deal  as  to  the  power  of  government  to  employ  the 
right  men. 

"  3.  There  is  not  a  town  in  America  which  has  tried  water-supply 
by  the  public  where  any  man  would  dare  to  propose  the  sale  of  the 
works  to  a  corporation.  In  my  own  home,  Boston,  the  engines  used 
by  the  city  are  the  finest  pieces  of  machiner}'.  They  are  among  the 
lions  of  the  town.  The  water  service  is  so  good  and  cheap  that  a  few 
years  ago  the  city  had  to  lower  the  rates  and  pay  us  back  rates  which 
it  had  overcharged  by  accident. 

"4.  There  is,  on  the  whole,  an  immense  advantage  in  publicity. 
State  ownership  means  the  printing,  from  day  to  day,  of  every  ac- 
count and  transaction  where  any  light  is  needed. 

"5.  As  for  jobs,  there  are  jobs  everywhere.  I  have  heard  of  the 
nephew  of  a  large  stockholder  being  placed  in  a  position  which  he 

^  Adams  on  "  Railroads,"  p.  115. 


REMEDIES   FOR   THE    RAILROAD    PROBLEM.     151 

ought  not  to  have  fille.l.  I  have  heard  of  such  a  man  runnin-j  away 
with  money  which  did  not  belong  him.  There  can  be  little  doubt 
that  the  loss  of  Massachusetts  or  of  the  United  States  by  dishonesty 
is  as   slii^ht  as  is  that  of  any  large  corporation. 

"  6.  The  uniform  civility  of  officers  of  the  state  is  a  point  of  great 
value.  Think  how  civil  post-office  officials  are  always,  and  how  rude 
the  majority  of  telegraph  operators  are.  This  is  simply  because  you 
are  one  of  the  post-office  clerk's  employers,  while  the  telegraph  opera- 
tor hates  you  because  you  make  her  work  when  she  is  tired.  She 
does  not  look  to  you  for  her  salary  as  tlie  post-office  man  does. 

"  7.  And  it  is  certainly  a  great  advantage  that  the  state  at  the  out- 
side needs  earn  but  three  per  cent,  to  pay  interests  on  its  investments, 
while  the  corporation  has  the  privilege  of  earning  ten."  ^ 

Professor  Richard  T.  Ely  presents  his  views  as 
follows  : 

"Our  present  policy  is  one  which  inevitably  leads  to  political 
degradation.  To  maintain  pure  government  in  a  country  like  the 
United  States  with  railways  private  property,  but  controlled  by  courts 
and  legislatures,  would  require  a  population  of  angelic  character,  or 
of  superhuman  wisdom,  if  not  of  both.  There  inevitably  arises  a 
strugo-le  between  two  vast  and  not  altogether  unequally  matched 
powers,  and  this  struggle  must  continue  as  long  as  our  policy  con- 
tinues. The  general  public  and  railway  owners  and  managers  are  the 
two  parties,  and  they  struggle  for  supremacy  in  government,  some- 
times openly,  often  secretly.  The  railways  must  seek  political 
power  for  private  ends.  They  must  have  their  agents  in  courts  and 
legislatures  to  protect  themselves  ;  but  they  do  not  stop  with  self- 
protection.  They  are  aggressive  and  seek  complete  control  for  the 
promotion  of  their  private  interests,  and  they  corrupt  legislators  with 
free  passes,  offices  for  themselves  or  friends,  retaining-fees,  sometimes 
direct  gifts  of  money,  and  in  every  city  hall  and  State  capitol  they 
maintain  a  disreputable  lobby."  - 

'  T/ie  Independent,  Aug.  20,  1 890. 

'  Idem.  Professor  Ely's  argument  has  been  summed  up  as  follows : 
"  The  evil  influence  of  corrupt  capitalists  is  especially  dangerous 
because  it  is  underhand  and  approaches  unawares.     State  manage- 
ment would  bring  the  conflicts  into  the  light.     \Vhere  one  person  has 


152       THE  CORPORATION  PROBLEM. 

Herbert  Spencer,  in  his  article  on  "  The  Coming 
Slavery,"  takes  an  entirely  different  view  of  this 
subject  and  says : 

"Then,  again,  comes  state  ownership  of  railways.  Already  this 
exists  to  a  large  extent  on  the  Continent.  Already  we  have  had  here 
a  few  years  ago  loud  advocacy  of  it.  And  now  the  cry,  which  was 
raised  by  sundry  politicians  and  publicists  is  taken  up  afresh  by  the 
Democratic  Federation  which  proposes  '  State  appropriation  of  rail- 
ways, with  or  without  compensation.'  Evidently,  pressure  from 
above  joined  by  pressure  from  below  is  likely  to  effect  this  change 
dictated  by  the  policy  everywhere  spreading  ;  and  with  it  must  come 
many  attendant  changes.  For  railway  proprietors,  at  first  owners  and 
workers  of  railways  only,  have  become  masters  of  numerous  businesses 
directly  or  indirectly  connected  with  railways  ;  and  these  will  have  to 
be  purchased  by  government  when  railways  are  purchased.  Already 
exclusive  letter-carrier,  exclusive  transmitter  of  telegrams,  and  on  the 
way  to  become  exclusive  carrier  of  parcels,  the  State  will  not  only  be 
exclusive  carrier  of  passengers,  goods,  and  minerals,  but  will  add  to  its 
present  various  trades  many  other  trades.  Even  now,  besides  erect- 
ing its  naval  and  military  establishments  and  building  harbors,  docks, 

suffered  from  dishonest  or  inefficient  government  management  of 
finances,  one  hundred  have  suffered  from  dishonest  or  inefficient 
management  of  railroads.  Improvements  in  the  details,  politeness  of 
employees,  etc.,  would  surely  follow,  and  small  places  would  be 
accommodated  more  on  a  par  with  large  cities,  as  was  the  case  when 
the  government  of  (ireat  Britain  took  the  telegraph  lines  in  that 
country.  No  more  parallel  lines  would  be  constructed.  The  inhu- 
manity of  railroad  managers  who  adopt  safety  appliances  to  save 
money,  but  not  to  save  the  men's  lives,  is  enlarged  upon.  Grade  cross- 
ings in  cities  would  be  abolished.  In  Prussia  the  financial  success  of 
government  ownership  has  surpassed  anticipations.  Public  owner- 
ship would  be  the  death  of  the  spoils  system  in  politics,  for  it  could 
not  live  when  its  real  significance  became  so  plain.  It  has  been  the 
peculiar  misfortune  of  political  economy  rarely  to  advocate  any 
reform  until  it  has  been  accomplished,  but  the  number  of  political 
economists  who  favor  government  ownership  is  increasing." 


REMEDIKS    l-Ol;     IHi:    KAIL1«>A1)    I'ROHLEM.     1 53 

break-waters,  etc.,  it  does  the  work  of  shipbuilder,  cannon-founder, 
small-arms  n.aker,  manufacturer  of  ammunition,  army-clothier  and 
boot-maker  ;  and  when  the  railways  have  been  appropriated  '  with  or 
without  compensation,'  as  the  Democratic  Fcderationists  say,  it  will 
have  to  become  locomotive-engine  builder,  carriage-maker,  tarpaulin 
and  grease  manufacturer,  passenger-vessel  owner,  coal-miner,  stone- 
quarricr,  omnibus  juoprietor,  etc.  Meanwhile  its  local  lieutenants, 
the  municipal  governments,  already,  in  many  places,  suppliersof  water, 
gas-makers,  owners  and  workers  of  tramways,  proprietors  of  baths, 
will  dt)ubtless  have  undertaken  varioits  other  businesses.  And  when 
the  State,  directly  or  by  proxy,  has  thus  come  into  possession  of,  or 
has  established,  numerous  concerns  for  wholesale  production  and  for 
wholesale  distribution,  there  will  be  gotxl  precedents  for  extending  its 
function  to  retail  distribution  :  following  such  an  example,  say,  as  is 
offered  by  the  French  Government,  which  has  long  been  a  retail 
tobacconist." 

The  view  taken  of  this  subject  by  Mr.  Ashby,  the 
lecturer  of  the  National  Farmers'  Alliance,  an  or- 
ganization that  is  practically  in  control  of  several  of 
the  Western  States,  is  as  follows : 

'*  Rome  had  her  great  highways  built  at  public  expense.  These 
roads  were  the  arteries  for  her  commerce,  and  the  nerves  which  kept 
up  the  communication  between  Rome,  as  the  head,  and  her  members, 
the  jirovinces.  Those  highways  were  public  ;  they  belonged  to  the 
state.  What  the  great  '  ways '  as  they  vere  called,  were  to  Rome  and 
the  Romans,  the  railways  are  to  the  United  States  and  its  citizens. 
They  have  superseded  the  State  road  and  the  turnpike.  Our  rail- 
ways have  been  built  at  public  expense  as  ]-)ublic  highways.  But  our 
highways,  the  railroads,  have  been  surrendered  to  private  corpora- 
tions. 

"  We  have  our  great  *  ways  *  but  they  are  controlled  by  the  lust  of 
private  greed  ;  our  Roman  '  ways  '  are  not  of  the  public,  but  of  the 
corporation.  ^^^loever  controlled  the  great  '  ways '  of  Rome  was 
master  of  Rome  and  the  Romans.  Such  must  be  our  fate  as  well. 
Tlie  railways  are  our  veins  and  arteries  of  commerce.  Whoever  con- 
trols the  commerce  of  a  country  as  the  railroads  control  ours,  w  ill  be 
the  masters  of  the  country.    This  is  the  inevitable.    Shall  it  be  the  peo- 


154  THE   CORPORATION   PROBLEM. 

pie,  through  their  government  ?  Shall  it  be  the  lords  of  the  rail, 
through  the  government  they  will  set  up  ?  Shall  it  be  the  people,  or 
plutocracy?"  ^ 

It  may  truly  be  said,  however,  that  there  is  an  in- 
stinctive feeling  on  the  part  of  Americans  that  state 
ownership  and  management  of  railroads  are  hostile 
to  sound  principles  of  government.  Ever  since  the 
year  1215,  when  the  barons  at  Runnymede  forced 
Magna  Charta  from  King  John,  the  English  speak- 
ing people  have  been  jealous  of  any  increase  of 
government  functions.  The  tyranny  of  the  state 
is  prevented  by  restricting  the  work  of  the  state. 
It  is  true  that  the  federal  government  has  gone  far 
in  the  Interstate-Commerce  Act,  but  this  act  was 
merely  a  prohibition  against  railroad  abuses.  An 
enlargement  of  the  functions  of  the  United  States 
Government  by  giving  it  the  ownership  and  opera- 
tion of  160,000  miles  of  railroad  is  not  within  the 
range  of  probabilities.  The  state  is  kept  pure 
by  the  simplicity  of  its  duties.  State  ownership 
of  railroads  means  a  transfer  of  inordinate  railroad 
wealth  and  power  to  the  state.  Railroad  tyranny 
would  pass  to  state  tyranny  and  would  be  in- 
creased a  thousandfold.  A  republic  which  en- 
dures with  difficulty  the  tension  and  strain  caused 
by  the  exercise  of  its  present  governmental  func- 
tions could  not  and  would  not  long  survive  federal 
ownership  and  management  of  railroads.  Such 
ownership  of  railroads  might  temporarily  leave 
to  the   people   the   nominal  control  of   the  govern- 

1  "  The  Riddle  of  the  Sphinx,"  p.  282. 


KKMK1)11>    1"R     iiii.    K.\ll.l<<  )A1)    PROBLEM.     1 55 

ment,  but  the  real  control  of  that  government  would 
be  with  the  corporation  classes.  ' 

PERIODICAL    LKASINc;    OF    FRANCHISES    UY    THE    STATE    AS 

A    REMEDY. 

Closely  related  to  the  question  of  whether  the 
state  shall  own  and  operate  the  railroads,  is  the 
question  of  whether  the  state  shall  own  and  lease 
those  railroads.  As  will  be  shown  hereafter,  the 
American  cities  have  wasted  their  birthright  in  giv- 
ing away  the  franchises  of  street  railways,  gas-works, 
electric-light  plant,  water-works,  electric  lights,  tele- 
phones, telegraphs,  ferries,  wharves,  and  other  natu- 
ral monopolies.' 

If  these  natural  monopolies  had  not  been  granted 
at  all,  or  had  been  granted  for  a  few  years  only,  with 
the  right  to  the  city  to  retake  them,  or  had  been 
sold  or  leased  to  the  party  that  offered  the  highest 
percentage  of  gross  receipts,  or  had  been  operated  by 
the  municipalities  themselves,  the  financial  gain  to 
the  municipalities  would  have  been  almost  incredible. 

'  Senator  Carlisle  of  Kentucky  stated  these  objections  forcibly  in 
May,  1 891,  when  after  showing  that  the  railroads  of  America  would 
cost  the  government  about  fourteen  millions  of  dollars,  he  proceeded 
to  say : 

"Are  you  ready  to  tax  yourselves  to  raise  this  money?  Then, 
after  you  have  got  the  property,  are  you  ready  to  tax  yourselves  to 
operate  it,  for  the  Government  never  yet  succeeded  in  doing  business 
at  a  profit  ?  Consider  another  effect ;  such  a  plan  would  add  perhaps 
1,200,000  men  and  women  to  the  roll  of  Government  employees. 
Howr  would  you  ever  succeed  in  turning  out  of  power  an  administra- 
tion with  such  resources  at  its  command  ?  The  more  corrupt  it  was 
the  more  difficult  it  would  be  to  displace  it." 

•See  Chapter  IV. 


156       THE  CORPORATION  PROBLEM. 

It  is  a  serious  question,  however,  whether  the 
same  poHcy  would  have  been  possible  with  the  rail- 
roads. There  are  the  same  objections  to  a  state 
ownership  and  leasing  of  railroads,  and  to  a  state 
ownership  and  frequent  reselling  of  the  franchises 
without  state  ownership  of  the  property,  that  there 
are  against  state  ownership  and  operation  of  rail- 
roads. Indeed,  state  leasing  of  roads  is  worse  in 
some  respects  than  state  ownership  of  roads.  The 
former  plan  means  a  constant  corruption  and  disturb- 
ance of  the  government  by  the  corporations  which 
are  operating  or  seeking  to  obtain  the  franchises. 
When  France  possessed  the  right  of  reversion  of  all 
its  railroads,  the  railroads  waited  until  the  govern- 
ment became  impecunious,  and  then  forced  it  to  give 
up  its  reversionary  interest.  Illinois,  Michigan,  and 
Georgia,  and  possibly  some  other  States  have  tried 
the  plan  of  State  ownership,  and  in  some  instances 
leases  have  been  made  of  the  roads  to  private  cor- 
porations. It  is  true  that  when  these  leases  entitled 
the  State  to  a  proportion  of  the  gross  receipts,  the 
State  derived  a  large  revenue  from  this  source.  But 
in  all  such  instances  there  has  been  a  constant  clash- 
ing of  corporate  interests  with  State  government. 
Sooner  or  later,  by  corruption,  bribery,  and  manipu- 
lation of  conventions,  the  corporations  will  manage  to 
control  the  State,  and  then  the  rental  is  reduced  or  is 
abandoned  altogether,  or  the  franchises  and  interests 
of  the  State  are  made  over  to  the  corporations.* 

'  The  Railroad  Gazette  points  out  still  another  objection  as  follows  : 
"  Mr.  Baker's  plans  are  not  absurdly  wild,  like  those  of  Mr.  Hud- 
son :  but,  as  far  as  they  go,  they  would  tend  to  have  somewhat  the 


REMEDIES   FOR   THE    RAILROAD    PROBLEM.     157 
STATE    REGULATION    OF    RAILROADS    AS    A    REMEDY. 

England  and  America  have  instinctively  refrained 
from  state  ownership  of  railroads.  The  policy  and 
tendency  of  Continental  Europe  in  this  respect  have 
not  been  followed.  Nevertheless,  in  both  England 
and  America  the  abuses  and  dangers  of  corporate 
ownership  of  railroads  have  been  felt  as  fully  as  they 
ever  were  felt  in  Continental  Europe.  These  abuses 
and  dangers  have  already  been  pointed  out.  They 
include  discriminations,  extortionate  charges,  wa- 
tered  stock  and    bonds,   free    passes,   pools,    frauds 

same  effect.  He  would  have  the  government  acquire  the  title  to  the 
franchise,  permanent  way,  and  real  estate  of  all  the  railroads  of  the 
countr)',  the  money  for  this  purpose  being  raised  by  issue  of  bonds  ; 
and  he  would  then  lease  these  roads  in  perpetuity  to  a  few  large  cor- 
porations, each  having  a  monopoly  within  its  district.  The  rates 
should  be  under  direct  government  control,  and  should  be  fixed  in 
such  a  way  as  to  allow  the  operating  companies  from  four  to  eight  per 
cent,  dividend,  according  to  circumstances.  This  is  substantially  the 
French  plan,  though  the  details  are  a  little  different.  The  combina- 
tion of  government  payment  for  roadbed,  district  monopoly  of  opera- 
ting companies,  and  government  control  of  construction  and  rates, 
has  been  consistently  tried  on  a  large  scale  and  with  all  the  conditions 
in  its  favor.  The  results  have  been  so  bad  that  if  Mr.  Baker  had 
been  familiar  with  them  he  would  not  have  recommended  us  to 
follow  the  French  example.  While  every  other  country  has  made 
great  reductions  in  rates,  France  remains  substantially  where  she  was 
twenty  years  ago.  With  a  large  and  rich  population  her  volume  of 
railroad  business  has  not  developed.  The  normal  trade  incentives 
have  been  taken  away  ;  the  hope  of  government  control  to  take  their 
place  has  proved  illusory.  Great  as  may  be  the  evils  of  the  American 
system,  exemption  from  them  would  be  dearly  purchased  if  it 
involved  the  loss  of  efficiency  for  the  present  and  progress  in  the 
future." 

See  still  further  im  this  subject  Chapter  IV. 


158       THE  CORPORATION  PROBLEM. 

on  stockholders  and  creditors,  municipal  aid,  special 
privileges,  exemption  from  taxation,  and  the  dire 
evils  of  railroad  bankruptcies,  foreclosures,  receiver- 
ships, and  reorganizations.  They  include  also  the 
constant  corruption  of  the  state  by  railroad  corpora- 
tions seeking  to  obtain  new  franchises,  or  to  modify 
or  protect  old  ones.  England  and  America  have 
both  felt  the  full  weight  of  these  troubles. 

Nevertheless,  for  the  most  part,  America  has  been 
constant  to  the  Anglo-Saxon  idea  that  the  true  func- 
tion of  government  is  to  protect  life,  liberty,  and 
property,  and  that  when  government  attempts  to  do 
more  than  this,  it  does  more  harm  than  good.  For 
the  most  part,  the  English-speaking  nations  have 
ceased  prescribing  by  statute  how  many  coats  a  man 
shall  own,  what  food  he  shall  eat,  what  he  shall 
drink,  how  many  servants  he  shall  employ,  what 
speculation  in  merchandise  he  shall  enter  into,  what 
business  methods  he  shall  adopt,  and  what  opinions 
he  shall  hold.  State  regulation  of  such  matters  is 
hostile  to  personal  liberty. 

It  has  been  largely  on  account  of  this  feeling  that 
the  railroads  have  not  been  more  seriously  interfered 
with.  From  1830  to  1870  there  was  a  separation  of 
railroad  and  state,  as  wide  as  the  separation  of 
Church  and  state.  And  the  railroads,  particularly 
in  the  West,  made  the  best  of  their  opportunities. 
They  levied  extortionate  rates,  defied  municipalities 
and  legislatures,  paid  no  attention  to  the  complaints 
of  the  people,  and  conducted  themselves  generally 
as  the  owners  of  the  country  and  the  fulness  thereof. 
The  railroads  as  well  as  the  people  assumed  that  the 


KKMFDTFS    KoU    TIIK    UAlLRoAD    PROBLEM.     1 59 

State  should  bear  the  same  relations  towards  rail- 
roads that  it  bears  towards  other  business — namely 
the  duty  to  protect  life,  liberty,  and  j^roperty,  and 
to  do  nothing  more. 

But  this  theory  failed.  Railroad  practices,  railroad 
wealth,  and  railroad  power  became  insolent,  usurping, 
and  corrupt.  The  railroads  were  not  only  discrimi- 
nating and  levying  oppressive  charges  for  traffic,  but 
they  were  controlling  legislatures,  influencing  judges, 
corrupting  public  officers,  and  absorbing  the  press.  All 
the  avenues  of  expression  and  the  bulwarks  of  the 
people's  supremacy  were  falling  into  the  hands  of 
the  railroads.  The  time  had  come  for  a  change.  The 
old  theory  that  State  interference  with  business  was 
wrong  and  that  consequently  the  State  should  not 
interfere  with  the  railroads  was  found  to  be  too  nar- 
row. It  had  become  clear  that  either  the  State  must 
rule  the  railroads  or  the  railroads  would  rule  the 
State. 

Hence  it  was,  as  already  stated,'  that  in  1870  vari- 
ous Western  States  enacted  statutes  which  greatly 
reduced  the  charges  which  the  railroads  had  been 
collecting.  The  railroads  refused  to  obey  the  statutes 
and  claimed  that  such  statutes  were  contrary  to 
that  provision  of  the  Federal  Constitution  which 
declares  void  any  statute  of  a  State  which  impairs 
the  oblifjation  of  a  contract.  The  railroads  con- 
tended  that  their  charters,  being  contracts  between 
them  and  the  State,  were  violated  by  the  statutes, 
which  reduced  railroad  charges.     A  series  of  cases, 

'  See  Chapter  II. 


l6o  .   THE    CORPORATION   PROBLEM. 

called  the  "  Granger  Cases,"  were  commenced  to  test 
the  constitutionality  of  these  statutes.  The  Supreme 
Court  of  the  United  States  sustained  the  statutes 
and  since  that  time  the  railroads  have  necessarily- 
complied  with  them.  But  other  abuses  arose  and 
soon  became  unbearable.  The  railroads  gave  re- 
bates, secret  reductions,  and  all  kinds  of  discrimina- 
tions to  favored  shippers.  The  report  of  the 
Hepburn  Investigating  Committee  to  the  New  York 
Legislature  in  1879  uncovered  an  appalling  mass  of 
illegal  and  dishonest  practices.  New  statutes  were 
passed  and  State  Commissioners  were  appointed  and 
authorized  to  rectify  the  abuses.  Most  of  the  States 
of  the  Union  now  have  these  railroad  commissions. 
The  powers  granted  to  the  commissioners  vary  in 
each  State.  In  Massachusetts  their  power  is  simply 
that  of  investigating  and  recommending.  In  New 
York  it  is  about  the  same.  But  in  Iowa,  Kansas, 
Missouri,  Florida,  and  several  other  States  the  com- 
missioners are  given  power  to  order  the  railroads  to 
reduce  their  rates.  In  nearly  all  the  States  the  com- 
missioners have  power  to  prescribe  and  enforce 
regulations  concerning  speed  of  trains,  obstructions 
at  crossings,  precautions  against  collisions  and  other 
accidents,  adequate  depot  accommodations  and  fa- 
cilities for  shipment,  the  construction  and  mainte- 
nance of  cattle  guards,  road-  and  farm-crossings, 
side-tracks  to  mines  and  manufacturing  establish- 
ments, improved  switch  and  signal  systems,  and 
the  prevention  of  fraud  or  unjust  discrimination  in 
the  weighing,  billing,  and  transportation  of  freight  ; 
severe  penalties  being  often  prescribed  or  authorized 


REMEDIES   FOR   THE    RAILROAD    PROBLEM.     l6l 

for  their  enforcement.  But  in  regard'  to  all  this 
legislation  an  unexpected  difficulty  arose.  The 
Supreme  Court  of  the  United  States  decided  that  a 
State  statute  which  affected  freight  passing  from 
State  to  State  was  void  because  it  interfered  with 
the  exclusive  right  of  the  federal  government  to 
regulate  interstate  commerce.  After  this  decision 
there  remained  but  one  remedy.  Congress  was  called 
upon  to  enact  a  law  prohibiting  interstate  railroads 
from  continuing  the  abuses  which  then  existed.  In 
1887  such  a  law  was  enacted  by  Congress.  It  pro- 
hibited interstate  railroads  from  giving  discrimina- 
tions ;  from  issuing  free  passes  ;  from  charging  more 
for  a  short  haul  than  for  a  long  haul,  excepting  in  a 
few  cases  ;  and  it  created  a  commission  of  five  judges 
to  expound  and  administer  this  law.  Such  is  the 
present  situation  of  the  railroad  problem  in  America. 

In  England  also  the  regulation  of  railroads  by 
means  of  a  commission  is  the  policy  that  now  pre- 
vails. 

But  England  and  America  are  still  ver>'  far  from 
having  settled  the  railroad  and  corporation  problem. 
These  commissions  may  possibly  prevent  discrimina- 

'  So  far  ds  State  railroad  commissions  are  concerned,  however, 
the  farmers  are  already  becoming  dissatisfied  with  them.  The  lec- 
turer of  the  National  Farmers' Alliance  says:  "The  question  was 
complex,  the  corporations  ever  alert,  and  the  granger  was  soon  over- 
reached. Instead  of  law  he  accepted  a  compromise  in  the  form  of 
railway  commissioners  to  act  as  a  sort  of  board  of  arbitration.  The 
salaries  of  this  board  were  paid  by  the  railway  companies, — their 
appointment,  more  often  than  otherwise,  dictated  by  them.  These 
commissioners  practically  became  figure-heads,  either  through  false 
sympathies,  or  because  powerless  to  execute  their  own  orders." — "  The 

Riddle  of  the  Sphinx,"  p.  132. 
II 


1 62  THE  CORPORATION   PROBLEM. 

tions  and  excessive  rates.  Congress  may  even  pro- 
ceed to  reduce  and  regulate  the  rates  charged  on 
interstate  commerce.  But  State  or  national  regula- 
tion does  not  touch  the  deeper  questions  and 
difficulties  that  exist  between  the  railroads  and  the 
people.  Indeed,  these  commissions  will  tend  to 
increase  rather  than  decrease  the  corruption  of  the 
government  by  the  railroads  ;  increase  the  induce- 
ment of  the  corporations  to  control  and  dominate 
the  State  and  nation  ;  and  increase  the  tendency  of 
wealth  and  corporations  to  use  that  control,  not  for 
the  protection  of  the  people  and  of  republican  insti- 
tutions, but  for  grasping  more  wealth,  wielding  more 
power,  and  protecting  and  enlarging  the  franchises, 
and  privileges  which  they  already  possess. 

Adams  on  "  Railroads "  says  in  regard  to  these 
unsatisfactory  results : 

"  The  final  result  is  probably  yet  quite  remote,  and  will  be  reached 
only  by  degrees.  When  it  comes,  it  will  assuredly  work  itself  out  ; 
probably  in  a  very  commonplace  way.  The  development  will  then 
unquestionably  be  found  to  have  been  correspondent, — that  is,  con- 
sciously or  unconsciously,  the  government  on  one  side  and  the  railroad 
system  on  the  other  will  have  worked  towards  each  other."  ^ 

At  present,  it  is  very  doubtful  whether  even  the 
Interstate  Commerce  Commission  is  capable  of 
solving  any  of  the  difficulties  of  the  railroad  prob- 
lem. The  effects  of  the  Interstate  Commerce  Act 
have  given  rise  to  wide  discussion  and  great  differ- 
ence of  opinion.  The  railroad  advocates  claim  that 
the  anti-pooling  provision  and  the  prohibition  against 
charging  more  for  a  short  haul  than  a  long  haul  are 

^  Page  146. 


REM  ED  IKS    1(»K   THE    RAILROAD   PROBLEM.     163 

disastrous  ;  that  these  provisions  arc  ruining  the 
small  railroads,  and  leading  to  the  absorption  of 
small  lines  by  great  lines ;  that  the  prohibition 
against  free  passes  and  the  secret  sales  of  tickets  at  a 
discount  are  not  observed  and  cannot  be  enforced  ; 
that  the  prohibition  of  pools  promotes  railroad 
wars  and  secret  discriminations,  rate-cutting,  re- 
bates, and  under-billing  ;— in  short,  that  the  act  has 
demoralized  the  railroad  world,  and  made  things 
worse  than  they  were  before.' 

Answers,  however,  have  been  given  to  all  of  these 
objections,  and  these  answers  are  of  vital  importance 
because  the  movement  to  repeal  the  Interstate  Com- 
merce Act  is  a  strong  one.  They  are  as  follows: 
The  prohibition  of  the  pool  may  promote  railroad 
wars,  yet  railroad  wars  existed  before  pools,  and 
would  arise  if  the  Interstate  Commerce  Act 
were  repealed.  Railroad  wars  will  always  exist 
in  this  country  until  consolidation  takes  place. 
When  only  great  trunk  lines  remain  to  compete  for 
business,  they  will  divide  the  business,  parcel  out  the 
country,  and  railroad  wars  will  be  heard  of  no 
more.  Until  then  railroad  wars  will  occur.  Even 
though  the  Interstate  Commerce  Act  accelerates  the 
process  of  the  absorption  of  the  small  lines  by  the 
irreat  lines,  nevertheless  the  act  should  remain. 
Pools  delay  the  natural  course  of  events,  and  since 
the  pools  retard  the  manifest  solution  of  the 
railroad  problem,  pools  should  cease.  Nor  should 
the  long-  and  short-haul  provision  be  repealed.     The 

'  See  the  Railroad  Gazette,  Nov.  23,  1889  ;  Dec.  14,  1889  ;  Feb.  I, 
18S9  ;  Feb,  22,  1889  ;  and  Dec.  7,  188S. 


164  THE    CORPORATION   PROBLEM. 

effect  of  the  enactment  has  been  to  cause  the  rates 
between  the  great  commercial  centres  to  be  main- 
tained at  a  higher  point,  and  the  local  rates  to  be 
reduced.  It  has  prevented  small  lines  from  cutting 
through  rates  because  a  low  through  rate  necessitates 
equally  low  local  rates.  It  has  caused  the  railroads 
to  give  better  accommodations  to  local  business.  It 
has  decreased  the  attention  which  railroad  officers 
have  given  to  through  business, — a  prolific  source  of 
the  whole  list  of  railway  abuses.  It  has  caused 
small  towns,  cities,  and  villages  to  obtain  equally 
good  rates  with  the  larger  places,  and  has  prevented 
the  growth  of  the  latter  at  the  cost  of  the  former. 
It  is  true  that  the  act  has  aided  the  greatest  com- 
mercial centres,  while  injuring  the  smaller  commer- 
cial centres.  New  York  thrives  under  it.  Smaller 
cities,  such  as  Omaha  and  Detroit,  are  injured.  The 
cities  that  have  been  serving  as  middlemen  between 
the  great  metropolis  and  the  small  towns  have 
suffered.  The  middlemen  are  no  longer  needed. 
The  rate  from  the  great  commercial  centre  to  the 
small  town  is  lower,  or  as  low,  as  the  rate  from  that 
centre  to  another  city  added  to  the  rate  from  the 
latter  city  to  the  small  town. 

America  will  not  abandon  its  policy  of  State  and 
national  regulation  of  railroads.  It  will  not  repeal 
the  Interstate  Commerce  Act.  A  few  of  the  cities 
and  all  of  the  railroads  may  favor  that  repeal ;  but 
the  great  mass  of  the  people,  particularly  in  the 
West,  will  not  allow  it.     The  act  is  here  to  stay.  ' 

^  George  B.  Roberts,  President  of  the  Pennsylvania  Railroad,  re- 
cently testified  before  a  committee  of   the  Senate,    substantially  as 


REMEDIES   FOR   THE    RAILROAD    PROBLEM.     165 

Charles   Francis  Adams,   in  December,  1888,  said 
of  the  Interstate  Commerce  Act: 

"  Under  the  operation  of  the  act,  the  smaller  local  railroads 
throughout  the  country  are  being  ground  out  of  existence.  It  is  the 
long  haul  which  brings  in  the  profit.  The  smaller  independent  rail- 
roads cannot  have  the  long  haul,  and  can  only  be  operated  profitably 
in  connection  with  the  larger  railroads.  They  are  thus,  one  by  one, 
becoming  unremunerative,  and  being  forced,  whether  they  like  it  or 
not,  into  the  maws  of  the  few  great  systems  into  which  the  rail- 
roads of  the  country  are  rapidly  crystallizing.  .  .  .  Just  as  the 
small  local  railroads  are  crushed  out  of  existence  by  the  anti-pooling 
clause,  so  the  local  points  of  distribution  and  second-class  business 
centres  throughout  the  country  find  themselves,  because  of  the  long 
and  short  haul,  unable  to  compete  with  the  great  commercial  centres. 
Traffic,  under  the  provisions  of  the  act,  must  inevitably  seek  the 
railroad  having  the  long  haul  to  the  most  distant  and  largest  centres. 
The  operation  of  the  law  in  this  respect  is  now  beginning  to  make 
itself  felt  upon  the  smaller  distributing  points.  They  are  deprived  of 
their  markets  ;  for  those  who  formerly  bought  of  them  can  get  the 
same  goods  on  better  terms  from  the  larger  and  more  distant  centres. 

follows  :  The  condition  of  railroad  matters  has  been  bettered  since 
the  passage  of  the  Interstate  Commerce  law.  Evasion  of  the  law  is 
still  practised  ;  but  this  should  be  expected,  as  the  government  sud- 
denly thrust  a  great  change  upon  the  conditions  of  doing  business. 
Some  law  should  have  been  enacted  long  ago.  The  time  was 
certainly  ripe  for  some  sort  of  government  control.  The  old  pools 
cost  a  great  deal  of  money,  and  did  not  fully  serve  their  purpose. 
They  tended  to  increase  the  construction  of  competitive  lines.  If 
the  United  States  Government  took  a  more  paternal  interest  in  the 
roads,  if  the  State  governments  should  act  in  a  more  friendly  manner 
toward  them,  and  if  capital  might  be  diverted  from  building  unneces- 
sary roads,  the  railroads  of  the  United  States  would  prosper  more. 
He  was  not  prepared  to  admit  that  legalized  pooling  was  advisable. 
Pools  tended  to  prevent  the  natural  development  of  railroads.  He 
preferred  well-regulated  competition,  under  proper  laws,  to  any  form 
of  combination.  The  Pennsylvania  Railroad  had  for  years  been 
subject  to  the  long-  and  short-haul  law  in  the  State  of  Pennsylvania. 
See  report  in  Railroad  Gazette,  May  17,  1S89. 


l66        THE  CORPORATION  PROBLEM. 

The  old  local  system  of  distribution  is  broken  up  in  favor  of  the 
centralized  system.  This  fact  is  now  making  itself  apparent  to  the 
manufacturers  and  jobbers  of  the  smaller  cities  and  towns  as  against 
Chicago,  St.  Louis,  or  Cincinnati  ;  but,  as  sure  as  the  law  of  gravita- 
tion applies  to  all  places  and  works  under  all  circumstances,  this 
same  long-  and  short-haul  clause  will  next  make  itself  felt  against 
Chicago,  St.  Louis,  and  Cincinnati,  and  in  favor  of  New  York.  In 
other  words,  contrary  to  every  design  of  those  who  framed  the  act,  its 
provisions  have  lent  a  new  impetus  to  just  those  forces  Avhich  it  was 
intended  to  hold  in  check.  Instead  of  building  up  the  local  road  and 
the  small  distributing  centre,  it  is  working  the  sure  destruction  of 
both.  ...  If  that  act  were  totally  repealed  to-morrow,  it 
would  produce  but  a  temporary  and  stock-jobbing  relief.  For  a  few 
days  things  might  be  apparently  better  ;  but  they  would  be  sure  to 
drop  heavily  back  again  into  their  present  bad  state,  unless  the  knife 
of  reform  went  deeper  and  cut  at  the  root  of  the  evils  I  have  referred 
to.  The  railroad  system  must  heal  itself  ;  no  act  of  Congress,  or 
repeal  of  any  act  of  Congress,  will  greatly  help  it."  ^ 

RAILROAD    CONSOLIDATIONS    AS    A    REMEDY. 

''  Where  combination  is  possible,  competition  is 
impossible."     The  truth  of  this  terse  statement  of  an 

^  The  question  of  what  effect  the  Interstate  Commerce  Act  has  had 
upon  various  classes  of  cities  and  towns  is  considered  to  some  extent 
in  the  second  annual  report  of  the  Interstate  Commerce  Commission, 

pp.  50-34. 

For  the  opinion  of  the  Interstate  Commerce  Commission  concern- 
ing this  demand  of  the  railroads  for  the  repeal  of  the  anti-pool 
provision,  and  concerning  the  conduct  of  the  railroads  generally  when 
asked  for  information,  see  fourth  annual  report,  pp.  21-27. 

For  a  review  of  the  effects  of  the  long-  and  short-haul  clause,  and 
a  reference  to  many  statutes  by  the  States  in  reference  to  that  subject, 
see  the  fourth  annual  report  of  the  Interstate  Commerce  Commission, 
pp.  37.  &c. 

Mr.  A.  B.  Stickney,  Chairman  of  the  Board  of  Directors  of  the 
Chicago,  St.  Paul,  &  Kansas  City  Railroad  Company,  in  a  work  on 
"The  Railway  Problem,"  p.  211,  advocates  the  following  remedy: 
that  whenever  the  chief  executive  officer  of  the  federal  government 


REMEDIES   FOR   THE   RAILROAD    PROBLEM.     1 67 

economic  principle  has  been  demonstrated  by  the 
raihvay  histor>'  of  the  past  twenty  years.  Not  only 
this,  but  very  probably  the  most  striking  feature  of 
the  railroad  situation  to-day  is  the  swift  and  uncon- 
trollable tendency  towards  consolidation.  Trunk 
lines  are  being  united,  while  short  and  disconnected 
roads  are  being  absorbed.  Scarcely  a  month  elapses 
without  some  great  consolidation  being  announced. 
A  few  great  transcontinental  systems  of  railroads  are 
beginning  to  assume  enormous  proportions,  and  when 
their  work  has  been  accomplished  it  will  be  found 
that  all  other  roads  have  been  absorbed.  It  is  being 
done  by  leases,  sales,  consolidations,  mergers,  absorp- 
tions, and  amalgamations,  aided  by  railway  wars, 
railway  wrecking,  and  railway  bankruptcies,  fore- 
closures, receiverships,  and  reorganizations.  The 
country'  is  being  parcelled  out  among  a  few  great 
trunk  lines,  which  ultimately  will  reach  from  ocean 

having  charge  of  the  enforcement  of  the  interstate  commerce  laws 
becomes  satisfied  that  any  railroad  company  is  persistently  disobeying 
the  laws,  he  shall  have  power  to  take  possession  of  the  property  and 
manage  it  through  the  intervention  of  a  receiver  or  otherwise  until  he 
can  have  satisfactory  assurances  that  the  law  will  thereafter  be 
obeyed.  The  trouble  with  this  remedy  is  :  (i)  that  if  enforced  it 
would  ver)'  soon  place  all  the  great  railroads  in  the  country  in  the 
hands  of  the  governmental  receiver,  Mr.  Stickney's  road  included  ; 
(2^  the  question  of  fact  as  to  whether  a  railroad  was  or  was  not  per- 
sistently violating  the  law  would  be  even  more  difficult  than  it  is  now, 
and  litigation  resulting  therefrom  would  destroy  the  eflfectiveness  of 
the  remedy  ;  (3)  after  the  receiver's  administration  was  finished  there 
would  be  little  property  to  turn  back  to  the  company  ;  (4)  this  is 
another  plan  of  interference  by  government  with  all  the  incompetency, 
dishonesty,  vacillation,  superficial  treatment,  and  temporary  relief 
that  governmental  nostrums  involve  ;  (5)  the  remedy  is  not  a  perma- 
nent cure  ;  it  is  onlv  an  emetic. 


l68  THE   CORPORATION   PROBLEM. 

to  ocean.  Each  system  will  have  exclusive  posses- 
sion and  control  of  the  traffic  in  its  district,  and  each 
will  respect  the  territory  of  the  other.  In  England, 
out  of  two  hundred  and  sixty-two  companies  only 
eleven  remain.  For  thirty  years  Parliament  tried  to 
stem  the  tide  of  consolidation,  and  then  abandoned 
the  effort.  In  France  six  companies  remain  out  of 
forty-eight.  In  America  it  takes  twenty-seven  pages 
of  Poor's  ^'  Manual  of  Railroads  "  for  1889,  ^^^ 
thirty-one  pages  in  1890,  to  give  merely  a  list  of 
railroad  companies  which  have  become  merged  into 
others.  The  167,000  miles  of  American  railroad  are 
owned  by  1,705  companies,  but  the  operations  of  all 
these  are  controlled  by  436  organizations  that  are 
independent  of  each  other.  Thirty-three  systems 
control  more  than  a  thousand  miles  of  road  each, 
and  these  same  systems  control  forty-nine  per  cent, 
of  the  total  railroad  mileage  of  the  country. 

Railroad  consolidations  are  inevitable.  Constitu- 
tional and  statutory  prohibitions  cannot  prevent 
them.  They  are  due  to  the  certainty  of  increased 
profits  and  to  the  impossibility  of  maintaining  com- 
petition among  natural  monopolies.  They  are  the 
product  of  the  laws  of  trade,  and  the  laws  of  trade 
are  stronger  than  the  laws  of  men. 

The  consolidations  here  referred  to  are  where  one 
road  becomes  permanently  united  with  another  by 
union,  purchase,  merger,  or  long-time  lease.  Re- 
cently another  method  of  consolidation  has  been 
advocated, — the  railroad  "  trust."  No  such  trust 
on  a  large  scale  has  yet  been  attempted,  and  prob- 
ably  none    ever    will    be.     A    railroad    trust   would 


REMEDIES   FOR  THE   RAILROAD    PROBLEM.      1 69 

encounter  the  hostility  and  adverse  legislation  of 
every  State  in  the  Union.  Its  legality  would  be 
doubtful,  especially  in  the  light  of  the  recent  decision 
against  all  forms  of  trusts.  Moreover,  such  a  trust 
would  be  difficult  to  bring  about,  owing  to  the 
caution  and  large  interests  of  the  stockholders.  It 
would  be  subject  to  that  objection  to  all  trusts, 
namely,  the  unrestrained,  secret,  and  unlimited 
power  of  the  trustees.  It  would  be  liable  to  fall  to 
pieces  and  be  dissolved  by  consent,  dissensions,  dis- 
asters, or  judicial  interference.  A  consolidation,  on 
the  other  hand,  is  permanent,  reliable,  and  effective. 
The  railroad  trust  would  seem  to  be  unworthy  of 
serious  consideration.  It  may  be  formed.  It  can- 
not endure.' 

The  Railroad  Gazette  has  well  said : 

**  A  consolidation  which  actually  stands  is  worth  ten  times  as  much 
as  a  trust  which  totters  from  the  beginning  and  takes  the  first  oppor- 
tunity to  fall  to  pieces." 

And  the  Interstate  Commerce  Commission  has 
said  concerning  this  subject : 

'Anything  equivalent  to  consolidation  of  all  the  roads  of  the 
country  under  a  single  head,  or  even  those  of  a  considerable  section, 
whether  by  merger  or  by  the  formation  of  a  confederation  which 
should  have  powers  of  legal  control,  or  by  the  creation  of  what  is 
now  technically  denominated  a  trust,  could  hardly  be  supposed  possible 
even  if  the  parties  were  at  liberty  to  form  it  at  pleasure.  If  the  par- 
ties could  come  into  harmony  on  the  subject  an  arrangement  of  the 
sort  would  be  so  overshadowing,  so  powerful  in  its  control  over  the 
business  interests  of  the  country,  and  so  susceptible  of  being  used  for 

'  As  regards  the  form  of  organization  of  the  Wisconsin  Central 
Company  and  the  Richmond  and  West  Point  Terminal,  s^e  Chap.  V., 
under  the  heading  "  Definition  of  Trusts,"  notes. 


I/O  THE    CORPORATION    PROBLEM. 

mischievous  purposes  in  many  ways  that  public  policy  could  not  for  a 
moment  sanction  it,  at  least  unless  by  statute  it  were  held  in  close 
legal  restraints  and  under  effectual  public  supervision  and  control.^ 

Again,  competition  as  a  remedy  for  railroad  abuses 
has  proved  a  failure.  Mr.  Stickney  clearly  describes 
the  results  of  competition  between  railroads  when 
he  says : 

"  Competition  may  for  a  short  period  illegitimately  reduce  rates, 
but  its  great  province  is  to  produce  unjust  discrimination,  taking  by 
stealth  what  rightfully  belonged  to  one  and  giving  it  to  another.  It 
takes  from  the  poor  and  gives  to  the  rich  ;  from  the  many  and  gives 
to  the  few.  It  does  not  permit  men  in  the  ordinary  walks  of. life 
fairly  to  compete  with  one  another.  At  the  command  of  the  favorite 
it  drives  multitudes  of  men  from  their  chosen  vocations  and  indepen- 
dent business  pursuits,  thereafter  to  occupy  positions  as  clerks  and 
employees.  ^Vhile  the  favorite  becomes  rich,  they  become  poor.  It 
affects  the  value  of  real  estate,  making  that  of  farms  and  village 
property  in  non-competitive  districts  less,  and  in  increasing  that  of 
competitive  districts.  It  afifects  the  value  of  personal  property, 
making  it  greater  in  the  hands  of  large  shippers,  who  are  granted  cut 
rates,  than  in  the  hands  of  small  shippers  who  are  not  thus  favored. 
It  forces  population  along  with  manufactories  and  commerce  to  the 
large  cities.  Instead  of  allowing  the  artisan  to  live  in  the  smaller 
town,  where  it  might  be  possible  for  him  to  own  his  home,  and  with 
moderate  expenses  rear  his  family  in  the  quiet  and  amid  the  virtues 
of  the  country,  it  compels  him  to  live  in  the  vicious  tenement-house 
of  the  crowded  city.  His  children  have  reeking  pavements  instead  of 
green  fields  for  a  playground,  and  their  ears  are  greeted  with  coarse 
profanity  and  vulgar  language  instead  of  the  songs  of  birds.  The 
air  is  laden  with  the  disgusting  odors  of  the  ginshop  instead  of 
the  perfume  of  clover  blossoms,  and  instead  of  the  peaceful  scenes 
of  nature  they  are  made  familiar  with  vulgarity,  brutality,  and 
crime.  By  congesting  population  it  indirectly  promotes  disease, 
ignorance,  and  crime.  It  destroys  independent  occupations  and 
forces   the  wdiole   people    into   classes  ;    employers   and    employees, 

'  Second  annual  report,  p.  26. 


REMEDIES    FOR    TllK    KAl  l.lo  »A1 »    rkol'.l.EM.      171 

masters  and  servants,  autocrats  and  menials  akin  to  slaves,  A\Tiy 
should  the  people  longer  worship  the  monstrosity  of  discrimination 
l)ecause  perchance  it  b  i<  1'ten  called  competitii)n,  t)r  mourn  over 
its  destruction  ?"  ' 

And  Mr.  Acworth  summarizes  the  results  of  rail- 
road competition  in  America  as  follows  : 

"  Wholesale  bankruptcy  of  companies,  with  enormous  loss  to 
innocent  shareholders  ;  reckless  discrimination  between  local  rates 
and  competing  rates  ;  flagrant  dishonesty  in  preferences  given  to  big 
traders  over  smaller  rivals  ;  secret  rebates  and  discounts  which  have 
sapped  the  very  foundations  of  commercial  morality  ;  and  uncertainty 
which  has  made  what  should  have  been  legitimate  trading  often  little 
better  than  mere  Stock  Exchange  gambling.  This  is  strong  language, 
so  it  is  perhaps  as  well  to  produce  some  evidence  to  justify  it.  As 
for  the  bankruptcy  of  companies,  let  this  one  fact  suffice  :  Between 
Chicago  and  Cairo,  a  distance  of  367  miles,  there  are  twenty-two 
railway  companies  whose  lines  cross  that  of  the  Illinois  Central. 
Eighteen  out  of  the  twenty-two  have  passed  into  the  hands  of  a 
receiver  since  the  year  1874.""^ 

There  have  been  various  attempts  to  promote  com- 
petition and  to  stop  the  combination  and  consolidation 
of  railroads.  In  Pennsylvania  a  constitutional  pro- 
vision prohibits  the  consolidation  of  competing  rail- 
roads. When  the  South  Pennsylvania  railroad  was 
being  constructed  in  1884,  the  great  Pennsylvania 
Railroad  arranged  to  purchase  it  and  thus  dispose  of 
a  dangerous  competitor.  But  the  State  interfered 
and  enjoined  the  purchase.  Nevertheless  the  South 
Pennsylvania  railroad  has  not  been  completed,  and 
the  failure  to  complete  it  is  due  to  the  Pennsylvania 

'  "  The  Railway  Problem,"  pp.  224-226.  This  book  is  fdled  with 
original  ideas  and  vigorous  thought.  It  is  remarkable,  in  that  its 
author,  one  of  the  brainiest  railroad  men  in  the  country,  justifie£ 
the  reduction  of  rates  by  the  legislatures. 

'  "  The  Railways  and  tlxe  Traders,"  pp.  152,  133. 


1/2  THE    CORPORATION    TROBLEM. 

Railroad.  The  State  prevented  a  consolidation,  but 
it  prevented  also  the  completion  of  the  competitor. 
Various  other  States  have  this  same  prohibition 
against  the  consolidation  of  competing  lines,  but 
the  march  of  events  has  not  been,  and  cannot  be, 
stopped  by  them. 

In  England  as  well  as  America  the  conclusion  is 
being  reached  that  consolidation  is  inevitable  and 
cannot  be  stayed. 

Charles  Francis  Adams  speaks  of  this  as  follows : 

"  Nowhere  is  the  present  tendency  towards  the  concentration  of 
railroad  interests  in  a  few  hands  more  apparent  than  in  England. 
The  mill  of  competition  has  there  about  fulfilled  its  allotted  work. 
The  whole  English  railway  system  has  now  passed  into  the  hands  of 
a  few  great  companies,  by  whom  the  country  is  practically  divided 
into  separate  districts.   These  are  literally  in  the  hands  of  monopolies. "  * 

'  England  for  sixty  years  has  been  trying  theory  after  theory  for 
the  solution  of  the  railroad  problem.  In  1872  a  Parliamentary 
Committee  made  an  elaborate  and  exhaustive  report  on  the  subject. 
The  substance  of  this  report  is  well  stated  in  Adams  on  "  Railroads," 
pp.  88-94,  as  follows  : 

"The  committee  examined  in  detail  the  various  parliamentary 
theories  which  had,  at  different  stages,  marked  the  development 
of  the  railroad  system.  The  highway  analogy  was  dismissed  in 
silence  ;  but  of  the  '  enlightened  view  of  self-interest  *  theory,  it 
was  remarked  that  experience  had  shown  that  as  a  regulating  force 
this  was  to  be  relied  upon  *  only  to  a  limited  extent.'  The  principle 
of  competition  was  next  discussed,  and  the  conclusion  of  the  com- 
mittee was  '  that  competition  between  railroads  exists  only  to  a 
limiied  extent,  and  cannot  be  maintained  by  legislation.'  Of  the 
great  Gladstone  Act  of  1845,  looking  to  the  ultimate  purchase  of  the 
railroads  by  the  government,  it  was  remarked  that  '  the  terms  of  that 
act  do  not  appear  to  be  suited  to  the  present  condition  of  railway 
property,  or  to  be  likely  to  be  adopted  by  Parliament  in  case  of  any 
intention  of  Parliament  at  any  future  time  to  purchase  the  railways.' 
,     .     .    The  committee  reported  that  amalgamation  '  had  not  brought 


REMEDIES    FOR     11  IK    RAILROAD    PROBLEM.      1 73 

There  is  no  doubt  that  the  objections  to  these  con- 
soHdations  are  grave  and  of  great  might.  Neverthe- 
less the  law  of  industrial  development  is  stronger 
than  human  statutes  and  constitutions.  It  is  time 
to  admit  this  fact,  and  to  ask  what  good  and  what 
injury  will  come  from  the  few  great  railway  systems 
which  are  destined  to  own  the  railroads  of  America. 

That  there  will  be  some  benefits  is  undeniable. 
First  and  foremost  there  will  be  greater  honesty  on 
the  part  of  the  railroads.  It  is  beginning  to  become 
clear  that  honesty  in  the  management  of  competing 
railroads  is  impossible.' 

Traffic  goes  to  him  who  cuts  the  rates,  under- 
weighs  the  shipment,  or  bribes  the  shipper  in  some 
one  of  the  numerous  methods  practised  by  railroad 

with  it  the  evils  that  were  anticipated,  but  that  in  any  event  long 
and  varied  experience  had  fully  demonstrated  tlie  fact  that  while 
Parliament  might  hinder  and  thwart,  it  could  not  prevent  it,  but  it 
was  equally  powerless  to  lay  down  any  general  rules  determining  its 
limits  or  character.'  .  .  .  Finally  the  committee  examined  all  the 
various  panaceas  for  railroad  abuses  which  are  so  regularly  each  year 
brought  forward  as  novelties  in  the  legislatures  of  this  countrj'. 
These  they  passed  in  merciless  review.  Equal  mileage  rates  they 
found  inexpedient  as  well  as  impossible  ;  the  favorite  idea  of  revision 
of  rates  and  fares  with  a  view  to  establishing  a  legal  tariff  sufficient  to 
affcjrd  a  return  and  no  more  on  the  actual  cost  of  the  railroads, 
they  pronounced  entirely  impracticable  ;  tariff  of  maxima  charges 
incorporated  into  laws,  they  truly  said  had  been  repeatedly  enacted 
and  as  often  had  failed  ;  periodical  revisions  of  all  rates  and  fares 
by  goN-ernment  agents  they  found  to  be  practically  impossible, 
unless  some  standard  of  revision  which  had  not  yet  been  suggested 
could  be  devised." 

'Judge  Co<;ley,  speaking  before  the  annual  convention  of  State 
Railroad  Commissioners,  in  March,  1891,  summarized  his  conclusions 
as  follows  : 

"The  railroad  problem  is  certainly  not  to  be  found  in  the  legis- 


1/4  THE   CORPORATION   PROBLEM. 

men.  The  manager  who  deals  fairly  with  the  public 
and  all  shippers,  who  gives  equal  rates  to  all,  and 
secret  favors  to  none,  soon  sees  his  business  depart- 
ing and  soon  loses  his  own  position.  He  is  replaced 
by  a  "  live  man.' 

Railroad  consolidation  will  do  away  with  all  this. 
It  is  true  that  by  these  consolidations  railroad  rates 
will  not  be  reduced,  nor  will  issues  of  watered  stock 

lation  authorizing  the  building  of  railroads,  or  in  that  which  pre- 
scribes the  terms  and  conditions  under  which  the  building  shall  be 
carried  on  and  completed.  The  railroad  problem  is  also  not  to 
be  found  in  the  conditions  in  M'hich  the  roads  may  be  put  by  their 
projectors  or  managers,  or  the  manner  in  which  they  are  equipped  for 
the  purpose  of  operation, 

"The  relations  between  the  railroad  corporations  and  their  em- 
ployees do  not  present  the  railroad  problem  that  is  troubling  the 
country.  The  railroad  problem  is  not  to  be  found,  exclusively  at 
least,  in  the  diversities  which  exist  between  the  legislation  of  the 
several  States  when  compared  with  each  other,  or  between  the  same 
legislation  when  compared  with  that  of  the  Federal  Government. 

"  The  railroad  problem  is  not  to  be  found  altogether  in  the  fact  that 
railroad  rates  are  supposed  by  the  public  to  be  in  a  great  many  cases 
much  too  high,  or  that  there  is  unlawful  discrimination  in  the  trans- 
portation of  freights  and  of  passengers,  and  that  many  persons  are 
carried  free  who  are  not  entitled  to  it  by  law,  or  that  in  the  cases  in 
which  exceptions  are  made  by  the  law  to  the  general  rules  which  are 
prescribed,  the  railroad  corporations  contrive  to  increase  these  excep- 
tions, in  inadmissible  or  unwise  ways,  to  the  detriment  of  their  own 
revenues,  or  to  the  increase  of  the  charges  that  are  made  against  the 
community  in  general.  The  problem,  without  question,  is  present 
here,  but  not  in  its  entirety. 

"  This  is  the  'railroad  problem,'  There  are  mischiefs  in  railroad 
service  that  are  outside  of  it,  but  we  distinctly  indicate  the  main 
source  of  difficulty  when  we  place  our  finger  upon  the  power,  as 
it  exists  now,  to  make  and  unmake  the  rates  for  passenger  and 
freight  transportation.  So  long  as  500  bodies  of  men  in  the  country 
are  at  liberty  to  make  rate  sheets  at  pleasure,  and  to  unmake,  or  cut 


REMEDIES    FOR    THE    RAILROAD    TLOBLEM.      1 75 

and  bonds  be  prevented,  nor  will  the  conveniences 
of  trade  be  studied,  nor  will  the  bribery  of  public 
ofificials  cease.  But  the  cutting  of  rates  and  the  dis- 
criminations which  now  exist  will  sto^).  There  will 
no  longer  be  any  occasion  for  them. 

The  railroads  themselves  will  be  the  chief  gainers 
from  consolidations.  And  in  these  days  when 
"gentlemen's  agreements"  and  "presidents*  confer- 

anJ  recut  them  in  every  direction  at  their  own  unlimited  discretion, 
or  want  of  discretion,  and  with  little  restraint  on  the  part  of  the 
law,  except  as  it  imposes  a  few  days'  delay  in  putting  changes  in 
force,  the  problem  will  remain  to  trouble  us  ;  the  mere  existence  of 
the  power  making  losses,  disorder,  and  confusion  constantly  immi- 
nent. The  authority  to  reduce  rates  when  they  are  found  to  be 
excessive,  is  but  a  slight  corrective,  and  reaches  the  evils  only  on  the 
i>ublic  side  ;  and  I  need  hardly  remind  you  who  understand  it  so  well 
:hat,  in  this  matter  of  rates,  the  power  on  the  part  of  the  public 
authorities  to  compel  the  railroads  to  do  what  is  just  to  each  other 
in  respect  to  obser\ing  rates  which  they  have  once  made,  and  to 
adhering  to  rate  sheets  until  there  is  reasonable  ground  for  changing 
them,  is  so  very  slight  that  it  may  really  be  regarded  as  too  insignificant 
to  be  spoken  of  as  possessing  substantial  value." 

Isaac  II.  Bromley  says:  "It  has  not  been  possible,  since  the 
first  application  of  the  law  of  eminent  domain  in  the  grant  of  a  rail- 
road franchise,  to  manage  a  railroad  with  absolute  honesty  without 
driving  it  into  bankruptcy,  and  then,  through  a  receivership,  into 
more  practical  and  less  scrupulous  hands.  The  differences  in  railroad 
management  are  in  degrees  of  crookedness  only.  Straight  and  level 
lines  are  possible,  no  doubt,  in  building  railroads  ;  equally  possible 
in  managing  them.  That  they  are  not  so  built  or  so  managed  is  due 
to  an  unevenness  and  irregularity  on  the  outside  of  the  globe  and  the 
inside  of  man.  It  might  be  both  possible  and  practicable  for  a  man 
to  build  a  short  railroad  on  his  own  estate  and  manage  it  w  ith  abso- 
lute honesty.  It  is  a  different  thing  when  he  goes  to  a  legislature  for 
a  franchise.  Sinuosity  begins  there,  and  never  ends.  This  sounds 
like  cynicism  ;  it  is  not.  Things  are  growing  better  all  the  time. 
But  the  discussion  of  the  railroad  problem  needs  fresh  air." 


1/6  THE   CORPORATION   PROBLEM. 

ences"  are  endeavoring  to  bind  competing  railroads 
together/  it  is  well  to  remember  that  pools,  traffic 
contracts,  and  associations  to  regulate  rates  are 
transient  and  worthless.  Consolidation  absolute  and 
complete  is  the  only  solution.     It  may  be  that  in 

'  The  latest  plan  of  uniting  by  a  loose  and  unenforceable  agreement 
a  large  number  of  competing  railroads  is  the  proposed  agreement  of 
December,  i8go,  between  the  trunk  lines  west  of  Chicago  to  the  fol- 
lowing effect : 

' '  Resolved^  That  the  Presidents  here  assembled  agree  to  recom- 
mend to  their  respective  Boards  of  Directors  the  passage  of  the 
following  resolution  ; 

"  Whereas,  It  is  to  the  benefit  of  the  public  and  of  the  railway 
companies  whose  lines  are  situated  west  of  Chicago  and  St.  Louis  that 
they  should  co-operate  closely  with  each  other  in  the  management  of 
their  properties  for  the  purpose  of  securing  uniform,  reasonable,  and 
stable  rates  for  transportation,  and  such  economies  in  the  operation 
of  their  properties  for  the  better  accommodation  of  the  public  as  will 
insure  equitable  returns  from  the  capital  invested  ;  therefore  be  it 

' '  Resolved,  I .  That  a  new  association  shall  be  formed  between 
the  several  companies  whose  lines  are  situated  west  of  Chicago  and 
St.  Louis,  or  such  of  them  as  may  now  become  or  may  hereafter  be 
admitted  as  members  thereof. 

"  2.  That  the  affairs  of  this  association  shall  be  under  the  manage- 
ment and  direction  of  an  advisory  board,  to  consist  of  the  President 
and  one  member  of  the  Board  of  Directors  of  each  company. 

"  3.  That  the  advisory  board  so  constituted  shall  have  power  to 
establish  and  maintain  uniform  rates  between  competitive  points,  and 
to  decide  all  questions  of  common  interest  between  the  members  of 
the  association.  It  shall  also  have  entire  charge,  through  properly 
constituted  representatives,  of  all  outside  agencies  for  the  securing  of 
traffic  at  competitive  points.  If  any  officer  or  representative  of  any 
company  shall  authorize  or  promise,  directly  or  indirectly,  any  varia- 
tion from  established  tariffs,  he  shall  be  discharged  from  the  service, 
with  the  reasons  stated. 

' '  4.  The  rates  established  and  the  policy  adopted  by  the  Advisory 
Board  at  any  time  shall  continue  in  force  and  be  binding  upon  all 


REMEDIES    FOR    THE    RAILROAD    PROBLEM.      1/7 

order  to  bring  about  such  consolidation,  there  must 
be  raihoad  wars,  loss  (^f  dividends,  cutting  of 
rates,  and  a  demoralization  of  business.  It  may  be 
that  the  weaker  roads  must  be  crushed  until  they  are 
absorbed  by  tbe  greater.  All  this  will  involve  fright- 
companies  comprising  the  association  until  altered  by  subsequent 
action  of  the  board. 

"5.  A  vote  of  at  least  four  fifths  of  the  members  of  the  association 
shall  be  required  to  make  its  action  binding  upon  all. 

"C.  That  the  Advisory  Board  shall  appoint  proper  arbitrators, 
commissions,  and  other  representatives,  and  adopt  ])y-la\vs  to  carry  out 
the  purposes  of  the  association. 

"  7.  That  no  company  shall  withdraw  from  the  association  except 
after  ninety  days'  written  notice  by  resolution  of  the  Board  of 
Directors  to  every  other  member  of  the  association,  with  the  proviso, 
however,  that  the  association  shall  continue  for  at  least  six  months 
from  Jan.  i.  iSgi. 

"  S.  That  under  existing  conditions  it  is  expedient  for  this'company 
to  set  in  operation  the  policy  and  plan  indicated  in  the  foregoing  as 
early  as  practicable. 

"  9.   That  the  President  and  Mr.  .  one  of  the  Directors  of  this 

company,  be  and  they  are  hereby  appointed  to  be  the  representatives 
of  this  company  in  such  advisory  board,  with  full  power  to  act  for 
this  company  in  carryinij  tlie  foregoing  preamble  and  resolution  into 
full  effect." 

This  agreement  is  an  outgrowth  of  an  existing  agreement  be- 
tween the  New  York  Central  and  Pennsylvania  railroads,  to  the 
following  effect ; 

"  IVIwreas,  It  is  for  the  best  interest  of  this  company,  as  well  as 
for  the  public  benefit,  that  general  harmony  shall  be  maintained  by 
and  between  the  New  York  Central  and  Hudson  River  Railroad 
Company,  the  Pennsylvania  Railroad  Company,  the  Pennsylvania 
Company,  the  Lake  Shore  and  Michigan  Southern  Railway  Company, 
the  Michigan  Central  Railroad  Company,  and  the  Cleveland,  Cincin- 
nati, Chicago  &  St.  Louis  Railway  Company,  for  which  object  it  is 
proposed  to  create  an  Advisory  Council,  consisting  of  the  President 
and  one  Director  of  each  of  said  companies,  with  power  to  decide  all 
12 


1/8  THE   CORPORATION   PROBLEM. 

ful  .loss  and  hardship.      Possibly  it  may  be  avoided 
by  gradual  purchase,  absorption,  and  consolidations. 

questions  of  common  interest,  to  avoid  wasteful  rivalry,  and  to  estab- 
lish uniformity  of  rates  between  competing  points. 

"Such  decision  of  such  Advisory  Council,  when  made  by  the 
affirmative  vote  of  the  representatives  of  five  of  said  companies,  and 
the  rates  and  policy  thereby  established,  to  continue  until  altered  by 
a  similar  vote  at  a  meeting  of  such  council,  unless  thirty  days  shall 
have  elapsed  without  a  meeting,  after  a  request  therefor  shall  have 
been  made  in  writing  by  any  one  of  such  companies  ;  now,  therefore, 

be  it 

'■'•Resolvea,  That  under  existing  conditions,  it  is  expedient  for  this 
company  to  set  in  operation  the  policy  and  plan  indicated  in  the  fore- 
going preamble. 

''Resolved,  That  the  President  and  one  of  the  Directors  of  this  com- 
pany be,  and  they  are  hereby  appointed  to  be,  the  representatives  of 
this  Company  in  such  Advisory  Council,  with  full  power  to  act  for 
this  company  in  carrying  the  foregoing  preamble  and  resolution  into 
full  effect,  this  company  reserving  the  right  to  withdraw  from  this 
arrangement  upon  resolution  of  its  Board  of  Directors  and  after 
ninety  days'  notice  in  writing  shall  have  been  given  to  every  other 
company." 

Mr.  Walker,  in  a  letter  of  November  20,  1890,  to  the  railroad 
presidents  in  advocacy  of  the  above-mentioned  general  agreement, 
said  : 

' '  Competition  as  it  now  exists  among  carriers  is  simply  war,  and 
the  situation  pleases  the  unreflecting  public.  ...  In  fighting 
each  other  the  various  lines  are  rapidly  destroying  themselves.  There 
is  no  occasion  for  aggressive  action  by  those  who  represent  an 
agrarian  policy.  All  they  need  to  do  is  to  watch  the  progress  of  the 
strife  among  the  roads,  and  drop  in  an  occasional  peg  as  the  cards  are 
played.  The  corner  has  already  been  turned,  and  the  pegs  are 
coming  toward  home.  During  the  past  fifteen  years  about  one  third 
of  the  railway  mileage  in  the  United  vStates  has  been  reorganized  or 
passed  through  foreclosure  proceedings.  One  line  after  another  steps 
one  side,  and  a  portion  of  its  capitalization  disappears.  Is  this  suicidal 
process  beyond  control?  I  do  not  believe  it.  But  radical  changes 
are  required  for  the  purpose." 


REMEDIES    FOR    THE    RAILRoAD    I'ROBLEM.      179 

But  certain  it  is  that  the  feeble  hand  of  the  proposed 
railroad  associations  merely  delays  the  fierce  process 
of  consolidation  by  means  of  railroad  wars  and  fore- 
closures. The  necessity  of  that  process  cannot  be 
obviated  by  such  makeshifts  and  hollow  truces.' 
Consolidations  and  consolidations  alone  will  accom- 
plish the  result  which  is  sought.  Discriminations  will 
decrease  ;  rates  will  be  more  uniform  ;  disastrous  rail- 
road wars  will  cease ;  legislative  lobbying  and  free 
pass  bribery  will  diminish  ;  the  construction  of  useless 
roads  will  be  prevented  ;  foreclosures,  receiverships, 
reorganizations,  losses,  and  financial  wrecks  of  rail- 
roads will  be  averted,  and  the  material  wealth  and 
financial  stability  of  the  country  will  be  enhanced.' 

'  Mr.  C.  P.  Huntington,  President  of  the  Southern  Pacific  Rail- 
road, said  concerning  the  presidents'  agreement  of  December,  1890  : 

"  I  repeat  that  I  think  this  plan  a  very  good  thing.  It  does  not  go 
far  enough,  but  it  is  in  the  right  direction." 

"  How  far  would  you  have  it  go  ?  " 

"  To  the  point  of  joint  ownership.  I  would  like  to  have  a  single 
company  operate  all  of  the  railroads  ;  then,  instead  of  a  lot  of  warring, 
self-destroying  elements,  we  would  have  a  homogeneous  and  prosperous 
body.  I  don't  mean  a  trust  or  anything  like  that,  but  a  concentration 
of  ownership  of  railroad  properties.  For  instance,  there  are  thirty 
different  railroads  in  the  Southern  Pacific  system.  The  stock  of  each 
one  is  owned  by  the  Southern  Pacific  Company.  Now  suppose  we  go 
a  step  higher  and  put  all  of  the  big  roads  into  the  hands  of  one  great 
corporation.  We  would  then  put  a  stop  to  rate-cutting,  ruinous  com- 
petition, and  many  useless  expenditures.  The  money  that  now  goes 
for  special  commissions,  drawbacks,  or  rebates,  and  for  salaries  for 
unnecessary  agents,  would  be  saved  to  the  shareholders.  Joint 
ownership  of  all  the  railroads  is  the  only  thing  that  will  make  uni- 
formity of  rates  absolutely  certain." 

"^  Atkinson  on  "  The  Distribution  of  Products,"  p.  38,  has  said  : 

**  The  late  Cornelius  Vanderbilt  may  be  taken  as  an   example  of  a 


l8o        THE  CORPORATION  PROBLEM. 

Consolidation  is  the  only  available  solution  of  the 
railroad  problem.  State  ownership  is  hostile  to 
Anglo-Saxon  instincts  and  settled  ideas  of  govern- 
ment. State  socialism,  such  as  Germany  is  fast 
drifting  into,  is  out  of  the  question  in  America. 
Federal  or  State  regulation  of  rates  and  abuses  does 
not  cure  the  evils  or  remove  the  danger  that  the 
railroads  will  dominate  the  State.  Co-operation  or 
profit-sharing  is  impracticable.  The  present  tenden- 
cies are  toward  a  further  regulation  of  railroads  on  the 
part  of  the  federal  government,  and  more  rapid  con- 
solidation on  the  part  of  the  railroads  themselves. 
When  these  two  tendencies  shall  have  reached  their 
natural  conclusion,  and  when  a  concentrated  railroad 
power  is  subject  to  regulation  by  the  federal  govern- 
ment, then  the  question  will  arise  which  is  the  greater, 
the  railroads  or  the  State.  The  question  then  will 
be — shall  the  State  rule  the  railroads,  or  will  the 
railroads  rule  the  State  ? 

At  present  the  work  of  consolidation  is  going  on. 
These  are  the  days  of  railroad  crystallization.  A  new 
power  is  arising  and  is  overshadowing  all  others. 
The  only  great  objection  to  it  is  the  danger  which  it 
brings  to  a  republican  form  of  government.  The 
future  relations  of  the  State  towards  the  railroads 


communist  in  the  true  sense.  He  consolidated  and  perfected  the  railroad 
service  in  such  a  way  that  a  year's  supply  of  meat  and  bread  can  be 
moved  one  thousand  miles  from  the  Western  prairies  to  the  Eastern 
workshops  at  the  measure  of  cost  of  a  single  day's  wages  of  a  me- 
chanic or  artisan  in  Massachusetts." 

Alexander  on  "  Railway  Practice,"  p.  59,  says  that  consolidations 
promote  economy  and  efficiency,  and  that  this  political  power  is 
limited  by  jealousy  of  the  press  and  popular  prejudice. 


REMEDIES    FOR   THE    RAILROAD    PROBLEM.      l8l 

cannot  be  foreseen  nor  foretold,  and  yet  those  rela- 
tions are  being  formed  to-day  and  are  entering  into 
the  very  warp  and  woof  of  American  institutions. 
The  problem  whether  the  people  or  the  corpora- 
tions shall  rule  the  republic  is  one  of  the  greatest 
problems  of  the  age.  It  is  the  subject  of  a  subse- 
quent chapter  of  this  work.' 

>  See  Chapter  VI.  Professor  Adams  on  "  Public  Debts,"  pp.  392, 
393,  says : 

*'  The  present  standing  of  private  corporations  before  the  law  con- 
tradicts the  rule  that  all  concentrated  power  should  be  exercised  under 
strict  accountability.  The  American  people  deceive  themselves  in 
assuming  to  think  their  liberties  endangered  only  by  the  encroach- 
ments of  government.  The  centre  from  which  power  may  be  exer- 
cised is  of  slight  importance  ;  it  is  the  fact  of  its  irresponsible  exercise 
which  may  justly  occasion  apprehension.  The  growth  of  private 
corporations  is  a  step  in  the  development  of  our  social  constitution. 
They  arose  upon  the  ruins  of  the  States  as  centres  of  industrial 
administration,  and  it  is  because  the  States  have  failed  to  retain  a 
proper  control  over  them  that  they  now  menace  the  permanency  of 
popular  government.  It  is  true  that  about  1873  the  right  of  legal 
control  was  judicially  affirmed,  but,  so  far  as  railroads  are  concerned, 
the  measures  adopted  by  the  various  legislatures  served  only  to  dis- 
close the  impotency  of  the  States.  These  corporations  are  practically 
irresponsible  to  the  people  by  whose  favor  they  exist,  and  whom  they 
pretend  to  serve.  Popular  liberty  could  be  menaced  by  no  greater 
danger." 


CHAPTER  IV. 

CORPORATIONS    AS    THE    OWNERS     OF    NATURAL 
MONOPOLIES. 

What    is    a    natural    monopoly  ? — Natural  monopolies  as 
the  sotirce  of  great  fortunes — Remedies  of  the  public. 

WHAT  IS  A  NATURAL  MONOPOLY  ? 

A  MONOPOLY  that  is  necessarily  such  from  the 
nature  of  the  case  is  called  a  natural  monopoly.  Its 
monopolistic  character  results  from  the  limited 
number  of  possible  competitors,  the  limited  space 
that  is  available  for  the  business,  or  the  limited 
number  of  franchises  within  the  gift  of  the  people. 

A  natural  monopoly  is  found  in  a  railroad,  street 
railroad,  telegraph  system,  telephone  system,  water- 
works, gas-works,  electric  lights,  irrigation  reservoirs, 
wharves,  and  ferries.  It  differs  from  other  business 
in  the  following  respects:  the  people  give  to  it  the 
right  to  take  private  land  and  the  public  streets  for 
its  use  ;  it  charges  a  toll  instead  of  a  profit  ;  it  is 
free  from  permanent  competition  ;  it  rapidly  in- 
creases in  value,  and  this  increase  is  due  not  to  its 
owners,  but  to  its  monopolistic  character  ;  its  value 
does  not  decrease  with  the  decease  of  its  owners,  as 

182 


OWNERS    OF    NATURAL    MONOPOLIES.  183 

is  the  case  w  ith  a  large  manufacturing  business  or 
professional  pursuit  ;  and  an  increase  of  population 
increases  its  income,  but  does  not  bring  new  com- 
petitors. 

These  are  important  distinctions. 

A  natural  monopoly  originates  generally  in  a  grant 
from  the  people.  A  railroad  can  be  built  only  by 
the  people  authorizing  it  to  take  private  land  under 
the  power  of  eminent  domain.  A  street  railway,  gas- 
plant,  electric  lights,  telegraph,  telephone,  and  water- 
works are  granted  the  right  to  use  the  public  streets. 
Wharves  are  built  on  the  seashore  which  belonged 
to  the  state,  and  ferries  are  authorized  by  munici- 
palities or  by  the  state.  These  privileges  granted 
b\'  the  public  to  natural  monopolies  are  called  fran- 
chises. This  kind  of  franchise,  however,  is  to  be 
clearly  distinguished  from  a  franchise  to  act  as  a 
corporation.  As  regards  corporations  there  are  two 
kinds  of  franchises  ;  one  consisting  of  the  power 
and  privilege  to  exist  as  a  corporation ;  the  other 
consisting  of  the  additional  peculiar  privileges  men- 
tioned above.  All  corporations  have  the  former 
— the  franchise  to  act  as  a  corporation.  This  last- 
mentioned  franchise  enables  the  corporation  to  sue 
and  be  sued  in  its  ow^n  name  instead  of  in  the  name 
of  its  members  ;  to  buy,  sell,  and  hold  property  in 
that  name  ;  to  have  directors  to  do  the  business  ;  to 
make  by-laws  and  contracts;  to  limit  the  liability  of 
its  members  as  regards  creditors  of  the  corporation  ; 
to  allow  its  members  to  transfer  their  interests  to 
another  ;  and  to  use  a  corporate  seal  in  its  deeds 
and    contracts.     All   these   constitute    one   kind  of 


1 84        THE  CORPORATION  PROBLEM. 

franchise — a  franchise  to  exist  and  act  as  a  corpora- 
tion. But  many  corporations  have  two  kinds  of 
franchises  :  the  franchise  to  act  as  a  corporation  ;  and 
additional  franchises  not  essential  to  their  corporate 
existence,  such  as  franchises  to  use  the  public  streets, 
to  take  private  land  for  their  purposes,  and  to  collect 
tolls  from  the  public.  A  manufacturing  or  business 
corporation  has  the  former  of  these  franchises.  Rail- 
road corporations  and  all  other  natural  monopolies 
have  both. 

There  is  reason  for  using  this  term,  natural  monop- 
oly. 

It  is  well  to  examine  the  histoiy  and  various  uses 
of  this  word  monopoly.  In  olden  times  under  the 
English  kings  a  monopoly  meant  an  exclusive  privi- 
lege granted  by  the  king.  It  was  a  grant  by  the 
king  and  not  by  Parliament.  In  the  formative  In- 
dustrial period  of  England,  the  government  Avished  to 
secure  the  establishment  in  that  country  of  certain 
trades  and  industries  that  were  then  successfully  car- 
ried on  in  foreign  countries,  especially  in  Flanders. 
Foreign  artificers,  tradesmen,  and  manufacturers  were 
invited  to  come  over  and  establish  their  industries 
In  England,  and  as  an  inducement  the  king  gave  them 
special  privileges,  such  as  the  exclusive  right  to  carry 
on  a  particular  industry,  or  the  exclusive  right  to 
certain  markets,  or  to  trade  exclusively  with  certain 
countries  or  colonies.  But  these  monopolies  soon 
restricted  progress,  shut  out  competition,  and  became 
odious  to  the  people.  Moreover,  the  crown  abused 
its  power  to  create  monopolies.  They  were  given 
as  gifts  to  royal  favorites,  and  were  sold  for  money, 


OWNERS   OF   NATURAL    MONOPOLIES.  1 85 

which  the  crown  then  employed  to  subvert  the 
constitutional  liberties  of  the  people.  Consequently 
there  arose  a  great  contest.  The  right  and  preroga- 
tive of  the  king  to  create  monopolies  were  denied. 
The  Parliament,  the  courts,  and  the  people  carried 
on  the  contest  against  the  crown,  and  Lord  Coke,  in 
the  great  Case  of  the  Monopolies,  declared  these 
crown  monopolies  to  be  void.  Nevertheless  the 
king  continued  to  create  them  and  to  sell  them.  One 
of  the  charges  against  Charles  the  First  was  his  un- 
lawful creation  of  monopolies.  But  finally  the 
crown  abandoned  its  claim,  and  at  the  present  time 
no  one  but  Parliament  has  power  to  create  such  a 
monopoly,  and  even  if  such  a  thing  were  attempted 
by  Parliament,  the  unwritten  constitution  of  Eng- 
land and  the  settled  principles  of  the  English  people 
would  soon  cause  the  act  to  be  repealed. 

In  modern  times  the  word  monopoly  has,  by 
usage,  been  given  a  wider  meaning.  It  means  the 
power  of  a  corporation  or  person  or  combination  to 
control  prices.  It  is  a  monopoly  in  a  particular 
business.  It  is  a  monopoly  for  the  present,  even 
though  in_  the  future  there  may  arise  competition. 
The  monopoly  may  be  in  the  manufacture  or  sale  of 
a  commodity,  or  in  the  control  of  the  rate  for  the 
transportation  of  persons  or  merchandise,  or  it  may 
consist  of  exclusive  privileges  granted  b\'  a  legisla- 
ture— privileges  conferred  by  statute. 

The  past  fifty  years  have  been  prolific  in  the  pro- 
duction of  monopolies.  They  exist  to-day  in  three 
different  forms:  monopolies  in  which  the  govern- 
ment has   prohibited   competition  ;    monopolies   by 


l86  THE   CORPORATION   PROBLEM. 

the  combination  of  competitors,  as  In  the  case  of 
trusts ;  and  third,  natural  monopoHes.  They  will 
be  considered  in  the  order  named. 

Monopolies  in  which  the  government  prohibited 
competition  were  freely  granted  fifty  years  ago. 
They  were  generally  granted  to  bridges,  ferries,  rail- 
roads, water-works,  gas-plant,  and  turnpikes.  A  bridge 
company  would  be  given  exclusive  privileges,  and 
no  other  bridge  for  a  certain  number  of  miles  above 
it  or  below  it  was  to  be  erected.  So  also  with  ferries 
and  railroads.  A  railroad  would  be  given  a  charter, 
and  that  charter  v/ould  prohibit  the  building  of  any 
other  railroad  for  a  certain  number  of  miles  on  either 
side  of  It.  Water-works  in  a  city  would  be  given  the 
exclusive  privilege  of  supplying  that  city  with  water. 
Gas-works  would  be  accorded  a  similar  monopoly  as 
to  gas.  And  even  turnpikes  were  given  exclusive 
privileges.  As  will  be  shown  hereafter,  these  various 
enterprises  are  natural  monopolies  in  themselves. 
But  the  point  to  which  attention  Is  now  called  is 
that  the  legislatures  have  added  to  their  monopolistic 
character  by  making  them  statutory  monopolies  also. 

All  these  monopolies  were  legal  and  constitutional. 
They  could  not  be  granted  by  municipalities  unless 
the  latter  had  express  power  to  grant  them..  But 
they  could  be  granted  by  the  State  legislatures,  and 
were  upheld  by  the  Supreme  Court  of  the  United 
States,  when  the  States  afterwards  attempted  to 
repudiate  their  reckless  gifts.  A  State,  however, 
could  not  grant  a  monopoly  as  to  water  transporta- 
tion, because  Congress  had  exclusive  power  over 
interstate    commerce.      The    monopoly  granted    by 


OWNERS   DK   NATURAL   MONOPOLIES.  iS/ 

New  York  State  to  certain  persons  relative  to  boats 
propelled  by  steam  was  declared  void. 

But  the  injustice,  improvidence,  and  bad  results  of 
these  statutory  monopolies  granted  to  bridges,  fer- 
ries, railroads,  turnpikes,  gas-plant,  and  water-works 
soon  became  apparent.  It  became  clear  that  a  little 
delay  would  have  brought  all  these  improvements 
without  the  statutory  monopolistic  grants.  The 
monopolies  themselves  became  unbearable.  They 
gave  poor  service,  neglected  repairs,  refused  improve- 
ments, disregarded  protests,  acquired  bad  manners, 
and  became  a  nuisance.  Attempts  were  made  to 
break  the  monopoly  by  starting  a  competitor.  But 
the  courts  sustained  the  monopoly  on  the  ground 
that  it  was  a  contract.  The  new  competitor  was 
enjoined.  The  courts,  however,  went  a  long  way  in 
construing  away  the  special  privileges.  Unless  the 
monopoly  was  clearly  granted  it  was  overthrown.  It 
was  limited  by  construction  as  much  as  possible. 
Moreover,  new  kinds  of  competition  were  fav^ored. 
The  courts  held  that  a  gas  monopoly  did  not  exclude 
an  electric-light  competitor,  nor  did  a  bridge  mo- 
nopoly exclude  a  railroad  bridge.  But  this  remedy 
was  not  enough.  The  people  were  hostile  to  monop- 
olies, and  this  hostility  took  form  in  constitutional 
prohibitions  against  monopolies.  Massachusetts  led 
tlie  way,  and  now  all  of  the  advanced  constitutions 
(jf  the  various  States  contain  a  provision  that  no 
special  or  exclusive  privilege  or  immunity  shall  be 
granted  to  any  corporation.' 

The  second  class  of  monopolies,  those  created   by 

'  See  Chapter  IL 


1 88  THE   CORPORATION    PROBLEM. 

the    combination    of  competitors,  have  come  to  be 
called  trusts.     They  are  considered  elsewhere.' 

The  third  class  is  the  natural  monopoly.  This  is 
a  monopoly  originating  in  a  statute,  and  afterwards 
becoming  a  monopoly  by  the  very  nature  of  things. 
It  is  a  right  given  by  statute,  and  yet  the  statute 
does  not  make  it  an  exclusive  right.  It  becomes 
exclusive  and  a  monopoly  by  reason  of  the  charac- 
ter of  the  business  itself.  It  includes  all  franchises 
to  collect  toll — railroads,  canals,  street  railroads,  gas- 
works, electric  lights,  telegraphs,  telephones,  wharves, 
ferries,  turnpikes,  bridges.  It  is  true  that  there  is 
nothing  in  the  law  to  prevent  competition,  but 
such  franchises  as  these  are  monopoHes  neverthe- 
less. They  are  so  because  competition  is  restricted 
by  the  great  cost,  great  risk,  and  great  danger  of 
loss,  or  because  from  the  circumstances  of  the  case 
competition  is  impossible.  They  are  monopolies  or 
soon  become  such  from  the  very  nature  of  the 
business. 

NATURAL    MONOPOLIES    AS    THE    SOURCE    OF    GREAT 

FORTUNES. 

It  is  curious  to  note  how  the  different  kinds  of 
property  have  a  different  relative  importance  in  the 
course  of  time.  Five  hundred  years  ago  real  estate 
was  the  only  property  that  brought  wealth  and 
standing  to  its  owner.  Personal  property  was  of 
little  consequence,  and  not  much  of  it  was  in  exist- 
ence.    But  during  the  past  two  hundred  years  per- 

'  See  Chapter  V. 


OWNERS   OF   NATURAL    MOPOLOLIES.  1 89 

sonal  property  has  risen  to  the  ascendenc}'.  The 
banker,  merchant,  manufacturer,  and  capitaHst,  have 
become  wealthier  than  the  landowner.  The  moneyed 
classes  have  supplanted  the  landed  classes  in  import- 
ance. The  banker  millionaire  is  greater  and  more 
powerful  than  the  ducal  landlord. 

During  the  past  thirty  years,  however,  a  still  differ- 
ent source  of  wealth  has  sprung  into  existence.  It 
has  risen  to  the  first  importance,  and  has  created 
moneyed  kings  greater,  stronger,  richer  even  than 
the  banker  himself.  A  new  financial  era  has  been 
entered  upon.  Land,  the  old  source  of  centralized 
wealth,  inordinate  power,  caste  privileges,  and  here- 
ditary rights,  no  longer  maintains  its  pre-eminent 
importance.  In  its  place  has  come  the  natural 
monopoly  and  a  new  order  of  men  are  in  control. 
Crassus  and  Croesus  were  poor  men  compared  with 
the  modern  Vanderbilts.'  A  consolidated  railroad 
has  become  greater  than  a  dukedom. 

'  Professor  Adams  on  "  Public  Debts,"  pp.  339,  340,  says  : 
"  The  withdrawal  of  the  States  from  the  domain  of  internal  im- 
provements marks  the  rise  of  corporate  power  in  the  United  States. 
As  in  1S30,  the  Federal  government  abandoned  the  thought  of  direct 
control  over  remunerative  public  works,  giving  up  the  field  in  favor 
of  local  governments  ;  so,  during  the  years  from  1842  to  1S46,  a 
re\'ulsion  of  sentiment  turned  all  this  business  over  to  individuals. 
So  far  from  realizing  the  programme  of  Jacksonian  democracy, 
according  to  which  the  States  were  to  recover  their  administrative 
importance,  this  experiment  resulted  in  the  establishment  of  a  new 
power,  unknown  to  the  founders  of  our  government,  yet  intrusted  with 
truly  sovereign  functions.  The  rise  of  the  corporation  marks  an 
epoch  in  the  history  of  inland  commerce.  The  material  advancement 
of  the  United  States  since  1S50,  no  one  can  nor  does  one  care  to  deny  ; 
yet  the  industrial,  the  political,  and  the  social  influences  that  have  been 


190  THE    CORPORATION    PROBLEM. 

Professor  Bryce  speaks  of  the  railway  magnates  as 
follows  : 

' '  These  railway  kings  are  among  the  greatest  men  ;  perhaps  I  may 
say  are  the  greatest  men  in  America.  They  have  wealth,  else  they 
could  not  hold  the  position.  They  have  fame,  for  every  one  has 
heard  of  their  achievements,  every  newspaper  chronicles  their  move- 
ments. They  have  power,  more  power — that  is,  more  opportunity  of 
making  their  personal  will  prevail — than  perhaps  any  one  in  political 
life,  except  the  President  and  the  Speaker,  who  after  all  hold  theirs 
only  for  four  years  and  two  years,  while  the  railroad  monarch  may 
keep  his  for  life.  When  the  master  of  one  of  the  greatest  western 
lines  travels  towards  the  Pacific  on  his  palace  car,  his  journey  is  like 
a  royal  progress.  Governors  of  States  and  Territories  bow  before 
him,  legislatures  receive  him  in  solemn  session,  cities  and  towns  seek 
to  propitiate  him  ;  for  has  he  not  the  means  of  making  or  marring  a 
city's  fortunes.  .  .  .  Probably  no  career  draws  to  it,  or  unfolds 
and  develops,  so  much  of  the  characteristic  ability  of  the  nation  ;  and 
I  doubt  whether  any  congressional  legislation  will  greatly  reduce  the 
commanding  positions  which  these  potentates  hold  as  the  masters  of 
enterprises  whose  wealth,  geographical  extension,  and  influence  upon 
the  growth  of  the  country  and  the  fortunes  of  individuals,  find  no 
parallel  in  the  old  world."  ^ 

It  is  easy  to  understand  why  natural  monopolies 
are  valuable.  They  increase  in  value  with  the  in- 
crease of  population,  while  the  profits  of  other  busi- 

introduced  into  national  life  by  the  unprecedented  growth  of  cor- 
porate power,  are  the  occasion  for  grave  apprehension.  Cities  have 
been  unnecessarily  crowded,  real-estate  values  have  been  arbitrarily 
distributed,  a  social  dependence  is  being  introduced  not  surpassed  in 
its  evil  tendencies  by  any  previous  form  of  servitude,  politics  are 
being  run  in  the  interests  of  profit  to  those  already  gorged  with 
profit ;  while,  from  the  political  point  of  view,  it  is  to  the  encroach- 
ment of  private  corporations  as  much  as  to  the  centralizing  tendencies 
of  the  Federal  government  that  the  present  impotency  of  the  State 
ffovernment  is  due." 

'  Bryce's  "American  Commonwealth,"  vol.  ii.,  p.  515. 


OWNERS    OF    NATURAL    MONOPOLIES.  I9I 

ness  have  an  opposite  tendency.  The  price  of  mer- 
chandise goes  down  as  population  increases.  This  is 
because  the  cost  of  producing  the  merchandise  is 
decreased.  But  with  a  natural  monojjoly,  a  railroad, 
street  railroad,  telegraph,  telephone,  water-works, 
gas-plant,  electric  lights,  irrigation  reservoir,  wharf,  or 
ferr}',  there  is  no  such  reduction  of  price.  Reductions 
are  sometimes  made  in  the  charges,  but  these  reduc- 
tions are  insignificant  compared  with  the  increase  of 
business.  The  cost  of  operating  the  monopoly  does 
not  materially  increase  with  the  increase  of  popula- 
tion, but  that  increase  of  population  brings  a  rich 
and  ever  swelling  volume  of  money  into  the  coffers 
of  its  owner.  The  profits  become  so  large  that  even 
the  owner  dare  not  declare  the  rate  per  cent,  which 
he  receives  on  his  investment.  In  order  to  conceal 
his  real  profit,  he  pretends  that  he  has  invested  far 
more  than  he  has,  and  by  watered  stock  and 
bonds,  he  covers  up  his  profits.  Into  his  coffers 
come  sooner  or  later  the  surplus  earnings  of  the  toil- 
ing millions.  His  wealth  grows  with  the  population. 
The  large  risk  and  capital  involved  in  starting  a 
competing  concern  leave  him  without  a  competitor. 
This  fact,  together  with  the  fact  that  the  streets  of  a 
city  are  not  wide  enough  to  admit  many  competi- 
tors, and  that  these  competitors  inevitably  combine, 
soon  renders  the  natural  monopoly  complete.  The 
merchant,  the  lawyer,  the  doctor,  the  manufacturer, 
the  laborer — all  are  subject  to  competition.  But  the 
street  railway,  the  railroad,  the  ferry,  the  wharf,  the 
gas-plant,  the  electric  light,  the  telephone,  the  tele- 
graph, the  water-works — all   are  natural  monopolies. 


192  THE   CORPORATION   PROBLEM. 

There  is  a  limit  to  the  competitors — a  Hmit  fixed 
not  by  the  abiUty  to  do  the  work,  as  in  other  busi- 
ness, but  a  limit  fixed  by  the  limited  space  or  the 
certain  absorption  of  competitors.  All  other  kinds 
of  business  have  a  rise  and  fall.  If  the  energies  of 
the  participants  are  relaxed,  the  business  droops. 
When  A.  T.  Stewart  died,  his  immense  business  fell 
away.  But  a  natural  monopoly  does  not  depend  on 
the  talent  of  men.  It  never  dies,  but  it  grows  with 
the  growth  of  population.  It  is  free  from  perma- 
nent competition,  and  it  is  handed  on  from  one 
generation  to  another. 

It  is  well  to  examine  with  some  care  the  growth 
and  value  of  these  different  natural  monopolies. 

There  is  the  railroad.  It  rarely  pays  in  the  begin- 
ning. As  a  rule,  the  builders  of  a  railroad  lose  all 
they  put  into  it.  The  bondholders  take  it,  and 
even  they  generally  lose  a  part  of  their  investment. 
This  is  so  generally  true  that  comparatively  few 
railroads  are  now  built  except  by  the  old  lines.  They 
can  afford  to  hold  the  enterprise  and  wait  until  it 
becomes  a  paying  investment.  But  sooner  or  later 
the  railroad  begins  to  pay  and  its  income  increases 
with  the  population.  In  the  course  of  time  it  pays 
interest  and  dividends  on  many  times  its  actual  cost. 
And  it  increases  without  any  particular  additional 
outlay  or  exertion  on  the  part  of  the  railroad.  The 
increase  is  due  to  the  inherent  value  of  the  franchise 
— the  franchise  that  was  granted  by  the  people,  and 
which  derives  its  increased  value  from  the  increase 
of  the  people.  A  man  with  a  few  thousand  dollars 
may  begin  the  manufacture  of  matches,  and  possibly 


DWXEKS    <>1"    NATURAL    MONOPOLIES.  I93 

may  compete  \\  ith  the  Diamond  Match  Company's 
monopoly.  A  man  with  a  few  luindred  thousand 
dollars  may  construct  a  su^ar  refinery  and  compete 
with  the  SuLjar  Trust  monopoly.  A  man  with  a  few 
million  dollars  and  a  talent  for  a  certain  method  of 
doing  business  ma\'  construct  an  oil  refinery  and 
compete  with  the  Standard  Oil  Trust  monopoly. 
But  such  is  not  the  case  with  railroads.  A  new  road 
})aralleling  an  old  road  is  certain  to  lose  money. 
The  truth  is  that  a  railroad  is  a  natural  monopoly. 
To  construct  a  parallel  competitor  involves  great 
capital  and  great  loss.  The  day  of  paralleling 
railroads  has  gone  by.  The  disastrous  results  of  the 
West  Shore  and  the  South  Pennsylvania  railroads 
have  been  a  costly  warning.  That  the  railroad  is  a 
practical  nionopoly  is  due  to  the  fact  that  a  parallel 
and  competing  line  is  soon  absorbed  or  else  is  driven 
into  bankruptcy  and  then  bought  up.  The  greatest 
fortunes  that  the  world  has  ever  seen  have  arisen 
from  the  wealth-producing  power  of  the  railroad 
monopoly. 

The    Duke    of    Marlborough,    in    the   Fortnightly 
Reviezv,  says : 

"  It  is  not  a  flattering  thing,  perhaps,  to  our  national  pride,  but  if 
the  truth  is  t<jld  our  English  railways  are  toy  systems  and  our  rolling 
stock  are  toy  freight  carriers  compared  to  the  trains  that  are  run  all 
over  America.  The  immense  haulage  of  American  lines  done  on 
single  pairs  of  rails  is  marvellous,  and  these  systems  must  continue  to 
grow  to  meet  the  wants  of  increasing  population  and  the  large  cen- 
tres of  permanent  industry  and  manufacture  that  exist  ever^'^\'here. 
It  must  be  noted,  however,  that  the  great  main  arteries  of  these 
sj-stems  are  now  permanently  marked  out.  It  will  be  practically 
impossible  to  make  new  main  routes,  except  at  fabulous  cost,  with 
approaches  to  the  coast.  The  strategical  positions  are  seized  and 
13 


194  'i'HE    CORPORATION   PROBLEM. 

occupied,  and  whoever  can  possess  himself  to-day  of  a  controlling 
interest  in  a  main  through  route  and  allied  feeders  across  the  great 
central  basin  of  the  Northern  States,  cannot  be  deprived  of  a  gigantic 
monopoly  in  the  present  and  in  the  future," 

So  also  with  the  street  railways.  When  first  con- 
structed the  street  railway  pays  little  or  nothing. 
But  soon  it  begins  to  be  valuable.  The  people  be- 
come educated  up  to  using  it.  The  town  grows  to 
be  a  city,  and  the  city  becomes  a  commercial  centre. 
The  street-railway  franchise — the  right  to  collect 
tolls — the  natural  monopoly  given  by  the  people  to 
a  corporation — becomes  more  and  more  valuable. 
Sooner  or  later  its  income  pays  an  extraordinary 
interest  on  the  original  capital  invested.  The  corpo- 
ration has  not  materially  increased  its  outlay.  But 
the  income  has  grown  with  the  growth  of  the  town. 

So  also  with  gas-works,  telegraphs,  telephones, 
electric  lights,  ferries,  wharves,  water-works,  and 
irrigation  reservoirs.  * 

^  Still  another  illustration  of  a  natural  monopoly  that  will  give 
trouble  in  the  future  is  the  underground  system  of  conduits  in  the 
streets  of  New  York  for  containing  the  telegraph,  telephone,  and 
other  wires  which  formerly  were  strung  on  poles  overhead.  A 
private  corporation  has  constructed  these  conduits  and  now  owns' 
them.  A  toll  is  levied  by  this  corporation  on  all  persons  or  corpora- 
tions who  run  M-ires  through  the  conduits,  and  of  course  all  wires  are 
now  obliged  to  go  underground  by  statute.  This  conduit  corpora- 
tion has  passed  under  the  control  of  one  of  the  great  telephone  and 
telegraph  monopolies  of  the  country  by  the  ownership  of  sixteen 
thousand  out  of  thirty  thousand  shares  of  stock.     This  great  monopoly, 

-by  methods  well  known  to  the  corporation  lawyer,  can  easily  make 
the  capital  stock  and  bonded  debt  of  the  conduit  company  so  large 

•  that- in  order -to  -pay  interest  and  reasonable  dividends  on  the  same, 
very  high  tolls  must  be  charged  by  the  conduit  company.      This,  in 


OWNERS   OF  NATURAL   MONOPOLIES.  I95 

The  histor}'  of  water-works  is  another  instance  of 
what  a  natural  monopoly  is  capable  of  becoming. 
It  is  impossible  to  ascertain  the  amount  of  water 
there  is  in  the  stock  and  bonds  of  water-works  com- 
panies, but  certain  it  is  tliat  where  the  works  are 
owned  by  a  corporation,  the  practice  is  to  construct 
the  works  by  the  sale  of  the  bonds  at  less  than  par, 
and  to  have  the  stock  free  of  cost :  in  other  words, 
all  water.  Even  then  it  is  rare  indeed  that  a  water- 
works company  goes  into  insolvency.  It  is  said  that 
only  three  foreclosures  of  mortgages  on  water-works 
have  taken  place  in  this  countr}\ 

itself  alone,  will  sufRce  to  keep  new  competitors  in  the  tele<;rai»h, 
telephone,  etc.,  business  out  of  the  city  of  New  York. 

Since  the  above  was  written  the  trouble  with  this  underground 
monopoly  has  commenced.  The  various  corporations  using  the  system 
in  September,  1890,  complained  to  the  City  Board  of  Electrical 
Control  that  exorbitant  charges  were  demanded  and  that  the  Edison 
Company,  being  owner  of  six  thousand  shares  of  stock,  had  the  iiiside 
favors  and  would  probably  exclude  all  other  electric  light  companies 
by  reason  thereof. 

The  scale  of  prices  asked  were  :  For  4-inch  ducts,  ^1,250  per  mile 
per  annum  ;  for  3-inch  ducts,  |i,ooo  per  mile  per  annum  ;  for 
2j-inch  ducts,  $850  per  mile  per  annum  :  for  2-inch  ducts,  ^700  per 
mile  per  annum  ;  for  ij-inch  ducts.  $550  per  mile  per  annum;  for 
l|-inch  ducts,  $500  j^er  annum  :  for  distribution  ducts,  I  to  4  inches, 
$1,000  per  annum. 

The  subway  company  filed  a  statement  to  the  effect  that  up  to 
January  I,  1890,  501  miles  of  telegraph  and  telephone  ducts  and 
515  miles  of  electric-light  and  power  ducts  had  been  constructed, 
making  a  total  of  1.016  miles  of  ducts,  the  cost  of  maintaining  and 
constructing  which  was  $4,827,647.97  from  1SS6  to  1890.  Only  404 
miles  of  subways  were  occupied,  producing  at  present  rates  an  annual 
rental  of  $388,771.  The  yearly  expenses  of  the  subway  company 
were  placed  at  $826,332,  and  an  annual  deficit  of  $437,611  waa 
figured  out. 


196  THE    CORPORATION    I'ROBLEM. 

In  England  one  of  the  seventy-two  shares  in  the 
New  River  Company,  which  supphes  London  with 
one  quarter  of  its  water,  recently  sold  for  $614,000, 
although  the  par  value  of  that  share  was  only  $500. 
This  enterprise  was  commenced  in  1609,  and  the 
company  was  organized  a  few  years  later.  It  built 
on  dry  land  the  New  River  to  conduct  water  for 
twenty  miles  by  a  route  of  about  forty  miles  to  the 
city  of  London.  King  James  I.  originally  owned 
one  half  the  shares,  but  in  161 3  sold  them  for  an 
annual  income  of  ^500.  This  sum  is  still  paid 
yearly.  The  net  return  on  the  whole  capital  stock 
for  the  year  1888  was  ;^  187,920.  The  dividend  on  a 
single  share  in  1 888  was  £2,610.  The  shares  are 
now  generally  divided  into  many  parts.  It  is  three 
centuries  since  a  full  undivided  share  has  been  sold. 
For  nineteen  years  after  the  company  was  formed 
the  annual  income  was  barely  12s.  a  share.  In  1634 
one  might  have  been  had  for  a  very  moderate  price, 
since  its  income  did  not  amount  to  more  than  £^ 
4s.  2d.,  while  its  profits  w-ere  practically  nothing. 
By  1636,  after  a  bad  year  or  two,  each  moiety 
brought  only  ^^115  lo^-.  of  profit,  and  toward  the 
close  of  the  last  century  the  return  was  no  more  than 
£42,'^  S-y*  8^/.  As  late  as  the  second  decade  of  this 
century  a  share  was  thought  to  have  attained  an 
extravagant  figure  when  it  sold  for  ;^ 1 1,500  at  auc- 
tion. But  now  its  value  is  unquestioned.  In  the 
rounded  sentences  of  its  owners,  it  may  well  be 
said  that  it  ^'  comprises  all  the  elements  desired  in 
the  employment  of  capital — security,  regularity,  and 
realizability.    It  combines  the  simplicity  of  a  govern- 


OWNERS    OF    XATT:RAI.    ^^ONOPOLTES.  I97 

mcnt  annuity,  the  profits  of  a  trading  corporation, 
and  the  prestige  of  landed  proprietorship.  Inasmuch 
as  it  includes  the  corporate  ownership  of  farms  in 
Hertfordshire  and  estates  in  London,  and  conveys 
the  right  to  vote  both  in  the  city  and  the  countr}^, 
with  the  possibility  of  a  seat  at  the  board,  and  the 
qualification  for  a  place  on  the  bench,  the  fraction  of 
the  Adventurer's  moiety  may  be  said  to  'embody 
the  potentiality  of  growing  rich  beyond  the  dreams 
ot  avarice. 

Another  remarkable  instance  of  private  water- 
works is  found  in  New  Jersey.  For  ten  years  Jersey 
City,  Newark,  Passaic,  and  adjacent  towns  have 
been  complaining  that  their  water  supply  was  pol- 
luted and  unfit  for  use.  The  source  of  supply  was 
the  Passaic  River,  below  the  great  falls  at  Paterson. 
The  cities  had  many  plans  for  reaching  the  upper 
waters  of  the  Passaic  River,  but  nothing  was  done. 
About  the  year  1885  3.  group  of  New  York  capital- 
ists took  the  matter  in  hand,  obtained  the  right  to 
the  entire  flow  of  the  Passaic  watershed  at  the  falls, 
and  to  the  control  of  every  lake  and  stream  in  a 
watershed  of  Zyj  square  miles,  including  Lake  Hopat- 
cong  and  Greenwood  Lake :  consolidated  all  private 
interest,  giving  a  storage  capacity  of  billions  of  gal- 
lons, and  arranged  to  bring  from  the  mountains  about 
450,000,000  gallons  of  pure  water  daily.  They  then 
offered  to  pipe  and  furnish  water  to  the  various  cities 
at  a  fixed  rate  per  million  gallons,  or  to  sell  to  any 
city  such  part  of  the  plant  and  pipe  as  would  give 
to  that  city  an  adequate  supply.  Popular  hostility 
ran  very  high,  and  statutes  were  passed  enabling  the 


198  THE    CORPORATION   PROBLEM. 

cities  to  circumvent  this  private  corporation.  But  it 
was  of  no  avail.  One  by  one  the  cities  of  Montclair, 
Passaic,  Paterson,  Newark,  Bayonne,  and  Jersey 
City  have  capitulated  to  the  corporation.  Most  of 
these  cities  have  agreed  to  pay  a  fixed  price  per 
million  gallons  ;  Bayonne,  for  instance,  paying  $80 
per  million  gallons.  Jersey  City  has  been  offered 
the  rate  of  $40  per  million  gallons.  Newark  adopted 
the  other  plan  and  paid  $6,000,000  for  a  complete 
plant  and  pipe  line  and  a  supply  of  275,000,000 
gallons  daily,  for  ten  years.  As  regards  the  corpora- 
tion it  is  said  that  over  $20,000,000  have  been 
invested  in  this  colossal  private  water-works  project, 
and  that  it  has  proved  a  profitable  venture. 

In  America  the  water-works  are  just  starting  on 
their  career  of  money-making.  And  there  is  so  much 
water  in  their  stock  and  bonds  it  is  impossible  to 
tell  what  rate  of  profit  they  are  actually  paying. 
But  the  facts  which  are  at  hand  prove  the  value  of 
the  monopoly  even  at  this  early  stage  of  its  growth.' 

There  is  still  another  natural  monopoly  and  one 
which  is  just  beginning  to  attract  the  attention  of 
the  country.  It  is  the  storage  and  distribution  of 
water  for  irrigation  in  the  West.  Whole  rivers  are 
being  diverted  for  this  purpose.     States  lying  along 

^  From  the  "  Manual  of  American  Water-Works  for  1888,"  pub- 
lished by  the  Engineering  News,  it  appears  that  up  to  that  date  there 
had  been  constructed  in  the  United  States  1,642  water-works  at  a  cost 
equal  to  something  more  than  a  tenth  of  the  bonded  debt  of  all  the 
railroads  in  the  country  up  to  the  same  time,  and  supplying  14,854,- 
612  of  the  population,  or  an  average  of  8, goo  per  works.  Of  the 
total  works  715  are  owned  by  the  city,  town,  or  village,  as  the  case 
may  be,  and  927  by  companies  or  individuals. 


OWXERJ^   OF  XATURAl.   MONOPOLIES.  I99 

the  lower  courses  of  rivers  are  comphiining  of  the 
disappearance  of  all  the  water  before  it  reaches  their 
borders.  \"ast  rescrv'oirs  for  storage  of  water  are 
being  built,  and  Congress  is  being  asked  to  take 
charge  of  the  irrigating  business.  English  com- 
panies own  a  large  part  of  these  reservoirs.  The 
spirit  of  speculation  is  becoming  interested  in  the 
tolls  which  hereafter  can  be  levied  on  the  farming 
and  land-owning  communities  of  the  West.  Im- 
mense tracts  of  land  are  sterile  without  this  artificial 
water  irrigation,  while  with  it  they  are  as  fertile  and 
productive  as  the  banks  of  the  Nile.  The  value  of 
such  a  natural  monopoly  as  this  is  almost  incalculable, 
and  it  is  a  monopoly  that  will  grow  with  the  years. 

"  The  laws  of  the  Western  States  and  Territories  everywhere 
recognize  and  protect  the  rights  of  the  first  or  '  prior  appropriator  * 
of  water.  If  the  first  settler  on  the  banks  of  a  stream  draws  off,  in 
his  ditch,  one  half  or  the  whole  of  the  customar}'  flow  to  irrigate  his 
farm,  he  has  the  right  to  take  this  one  half  or  the  whole  flow  forever, 
to  the  entire  exclusion  of  any  subsequent  settler.  But  the  same  rule 
applies  to  rivers  of  large  size.  As  the  quick-witted  Westerner  stands 
by  the  side  of  one  of  the  great  rivers  and  looks  over  thousands  of  acres 
of  desert  land  along  its  banks,  he  sees  a  fortune  in  the  situation. 
Only  get  capital  enough  together,  organize  a  great  company,  dig  an 
immense  canal  which  will  '  appropriate  '  all  the  water  in  the  river, 
and  you  command  the  whole  valley.  It  is  the  position  of  the 
Western  railroads  repeated.  Instead  of  waiting  for  settlers  to 
come  and  dig  little  ditches  as  they  need  them,  an  immense  capital 
digs  one  huge  canal,  watering  thousands  of  farms,  and  then  draws 
settlers  by  advertisement  and  boom.  So  all  over  the  West,  through- 
out Colorado,  in  Central  and  Southern  California,  in  Montana  and 
Idaho,  on  the  Salt  and  Gila  Rivers,  in  Southern  Arizona,  there  are 
great  companies,  with  capitals  running  into  the  millions,  putting  this 
idea  into  effect.  The  canals  they  dig  are  twenty,  thirty,  or  even  fifty 
miles  long.     The  largest  are  a  hundred  feet  wide  and  ten  feet  deep, 


200  THE    CORPORATION    PROBLE^r. 

very  rivers  in  themselves.  They  follow  the  contour  of  the  country, 
running  back  farther  and  farther  from  the  river  as  the  latter  falls 
away.  The  main  canal  gives  off  lateral  branches  at  frequent  intervals, 
and  by  an  ingenious  system  of  gates,  crossings,  and  ditches  sends 
water  to  every  foot  of  arable  ground  between  it  and  the  river.  The 
land  belongs  to  the  Government,  and  is  taken  up  by  individual  settlers 
at  merely  nominal  prices  under  the  '  Desert  Land  Act.*  But  the 
water  belongs  to  the  Canal  Company,  and  it  is  this  water  that  the 
settler  really  pays  for."  ^ 

REMEDIES    OF    THE    PUBLIC. 

For  the  most  part  the  natural  monopohes  of 
America  have  passed  Into  the  hands  of  corporations. 
The  State  legislatures  and  the  municipalities  have 
wasted  and  given  away  that  which  might  have  been 
of  almost  incalculable  value  to  the  public  if  properly- 
preserved.  Privileges  and  franchises  which  belonged 
to  the  people  and  which  grow  in  value  year  by  year 
have  been  given  away  to  become  the  instruments  of 
corporate  greed  and  gain.  And  all  this  has  been 
done,  not  from  settled  views  of  public  policy,  but 
quietly,  without  discussion  and  often  by  corruption 
of  public  officials. 

During  the  past  few  years  the  fact  has  become 
clear  to  the  public  that  natural  monopolies  are  be- 
coming ekceedingly  valuable.  That  which  was 
granted  to  aid  the  growth  of  a  city  is  now  found  to 
be  an  instrument  of  extortion  and  restriction.  The 
wealth  derived  from  the  natural  monopoly  is  used 
to  prevent  any  competition  whatsoever.  The  com- 
fort, accommodation,  and  rights  of  the  public  are 
disregarded.  Hence  it  is  that  public  opinion  is  at 
work  demanding  some  relief.     It  Is  somewhat  late 

^  From  "  Water  Storage  in  the  West,"  by  Walter  Gillette  Bates, 
in  Scribner. 


OWXEK.s    (-1     XATrRAI.    MONOPOLIES.  20I 

to  apply  a  remedy  to  the  mistakes  that  have  been 
made,  but  nevertheless  several  remedies  have  been 
proposed. 

Taxation  has  been  tried,  but  has  not  been  a  suc- 
cess. The  most  conspicuous  failure  t>f  this  method 
of  preserving  to  the  public  some  part  of  the  money 
value  of  the  natural  monopolies  has  been  in  the 
effort  to  collect  license  fees  from  street-car  lines. 
Generally  these  license  fees  were  fairly  respectable 
as  originally  fixed,  but  invariably  by  methods  well 
known  to  corporate  officials,  these  licenses  have  been 
reduced  by  the  city  authorities  and  usually  have 
disappeared  altogether. 

In  Cleveland,  Ohio,  the  street-car  companies* 
charters  paid  originally  a  license  fee  of  seventy-five 
dollars  a  car  and  one  cent  a  passenger,  but  this  has 
been  reduced  to  five  dollars  a  car.  In  Baltimore  the 
companies  originally  paid  twenty  per  cent,  of  their 
gross  income  to  the  city,  but  tliis  has  been  reduced 
to  nine  per  cent.  At  that  rate  they  paid  to  the 
city  in  1885  the  sum  of  one  hundred  and  fourteen 
thousand  dollars.  In  Chicago  the  companies  which 
have  been  chartered  since  1865  are  obliged  to  pay  an 
annual  tax  of  fifty  dollars  a  car.  In  Boston  very 
little  is  realized  to  the  city  from  the  franchise  tax. 
In  San  Francisco  there  is  a  license  fee  of  fifteen 
dollars  a  car,  and  an  annual  tax  on  the  franchises. 
In  Philadelphia  there  is  an  annual  license  tax  of 
fifty  dollars  a  car  and  a  tax  on  the  franchises. 

Moreover,  it  has  been  found  generally  that  it  is 
wellnigh  impossible  to  collect  the  tax.  The  com- 
panies evade  it,  and  pay  only  at  the  end  of  long  and 
strenuous    litigation.       To    such    an    extent    is   this 


202  THE    CORPORATION    PROBLEM. 

evasion  carried  in  New  York  that  in  some  cases  the 
tax  has  been  abandoned,  and  a  statute  has  been 
passed  requiring  the  company  to  pay  to  the  city  a 
certain  percentage  of  its  gross  receipts.' 

The  plan  of  compeUing  the  companies  to  pay  to 
the  city  a  certain  percentage  of  its  gross  receipts  is 
an  improvement  on  the  license  fee  for  each  car.  It 
is  levied  on  the  gross  receipts,  because,  if  levied  on 
the  net  profits,  the  company  might  manage  to 
defraud  the  city  by  paying  high  salaries  and  figuring 
out  little  or  no  net  profit.  The  tax  on  gross  receipts 
may  be  levied  not  only  on  the  gross  receipts  of  street 
railways,  bat  also  on  those  of  water-works,  gas  com- 
panies, and  other  monoplies.  Many  of  the  States 
have  statutes  compelling  railroads,  street  railroads, 
express  companies,  telephone  and  telegraph  com- 
panies, and  other  quasi  public  corporations,  to  pay  to 
the  State  a  certain  percentage  of  their  gross  receipts.'' 

^See  the  case,  Mayor,  etc.,  v.  Twenty-third  St.  Ry.  Co.,  113  N.  Y., 
311  (1889)  sustaining  the  constitutionality  of  a  statute  which  ordered 
a  company  to  pay  to  the  city  one  per  cent,  of  its  gross  receipts  instead 
of  an  annual  license  fee  of  fifty  dollars  a  car. 

2  The  State  of  Illinois  turned  over  the  Illinois  Central  Railroad  to  a 
corporation,  but  it  reserved  an  interest  in  the  profits. 

The  following  is  an  extract  from  the  message  of  the  Governor  of 
Illinois  to  the  legislature  in  1 891  : 

"  Under  the  wise  provision  which  retained  to  the  State  an  interest 
to  the  extent  of  7  per  cent,  of  the  gross  earnings  of  the  road,  to  be 
paid  annually  into  the  State  treasury,  there  has  been  paid  to  the  State, 
all  told,  for  the  years  from  1855  to  1890,  inclusive,  the  sum  of 
$12,365,618.  Upon  the  $40,000,000  of  capital  stock  of  the  company 
paid  in  there  was  paid  as  dividends  in  the  same  period  the  sum  of 
$64,782,357,  showing  that  an  amount  slightly  exceeding  19  per  cent, 
of  the  total  paid  as  dividends  has  been  turned  into  the  State  treasury  ; 
or  a  sum  equal  to  16.03  per  cent,  of  the  whole  sum  i)aid  both  to  the 
State  and  upon  stock.      The  last  year  the  State's  7  per  cent,  of  gross 


OWNERS    OF    NATrRAI.    MONOPOLIES.  203 

But  there  are  fundamental  defects  in  all  uf  these 
statutes.  They  are  difficult  to  enforce  because  the 
companies  conceal  the  full  amount  of  their  receipts. 
Not  even  the  ri^ht  of  the  State  or  city  to  investigate 
the  amount  of  receipts  is  sufficient  to  prevent  these 
frauds.  Moreover,  the  amount  received  in  taxes  is 
infinitesimal  compared  with  the  value  of  the  natural 
monopoly  itself. 

And  yet  taxation  is  one  method  of  redeeming  for 
the  people  a  small  part  of  the  value  of  the  franchises 
which  they  have  given  away.  But  in  order  to  accom- 
plish this,  the  present  rate  of  taxation  on  corpora- 
tions owning  a  natural  monopoly  will  have  to  be 
greatly  increased.  A  small  tax  may  bring  large 
returns,  but  it  is  trivial  compared  with  the  value  of 
the  franchise  which  produces  it.  Theoretically,  the 
tax  should  take  all  of  the  annual  income,  except 
such  as  will  pay  the  reasonable  expenses  of  the  cor- 
poration and  a  fair  return  on  the  cost  of  the  plant. 
It  is  impossible  now  to  levy  such  taxes  on  present 

earnings  paid  amounted  to  §486,281,  and  on  said  $40,cxx>,ooo  of 
stock  were  distributed  as  dividends  $2,400,000,  the  State's  portion 
being  nearly  17  per  cent,  of  tlie  whole  amount  so  paid.  The  showing 
for  the  last  six  months  ending  October  31,  1S90,  gives  the  State  as  its 
7  per  cent,  of  earnin^'s  $257,219,  or  at  a  rate  which  would  make  the 
income  of  the  State  from  this  source  over  half  a  million  jier  year, 
exceeding  in  amount  any  other  half  year  in  the  history  of  the  road. 
On  the  whole,  I  think  the  rapid  increase  in  the  State's  revenues  from 
this  source,  in  late  years,  rising  as  they  have  from  $3^7.799. '"  ^  ^^5.  to 
^86,281,  in  1S90,  presents  an  encouraging  prospect,  and  speaks  well 
for  the  eflficiency  of  the  present  management  of  the  company.  The 
further  building  of  new  competing  lines  of  railroad  having  entirely 
ceased,  there  seems  cause  to  hoj^e  for  a  gradual  and  healthy  growth  in 
the  revenue  of  the  lines  in  which  the  State  will  share  with  the  owners 
of  the  stock." 


204 


THE   CORPORATION   PROBLEM. 


monoplies,  but  it  is  possible  to  provide  for  the  future 
ones.  The  present  tendency  of  legislatures  is  to 
place  all  taxes  on  corporations.  And  so  far  as  taxes 
are  placed  on  corporations  which  own  these  natural 
monoplies,  such  a  rule  is  right.  The  law  allows  the 
tax  to  be  levied  on  the  capital  stock,  on  the  divi- 
dends, on  the  franchise,  on  the  gross  receipts,  on  the 
net  receipts,  on  the  cars,  on  the  shares  of  stock,  on 
the  market  value  of  the  stock,  or  on  the  estimated 
value  of  the  corporate  property.  Each  of  these 
methods  of  taxation  has  been  tried  with  varying 
success.  Most  of  them  have  had,  and  all  of  them 
should  have,  for  their  object  the  levying  of  a  tax  on 
the  natural  monopolies  owned  by  the  corporations. 
So  far  as  these  taxation  statutes  have  applied  to  cor- 
porations doing  a  manufacturing,  mercantile,  or 
similar  business,  they  are  unjust,  disastrous,  and 
indefensible,  but  so  far  as  they  form  a  part  of  the 
charters  of  the  corporations  operating  a  natural 
monopoly  they  are  right  and  are  to  be  commended.' 


'  The  following  table  relative  to  railroads  is  taken  from  the  United 
States  Census  Report  of  1880. 

! 

.Gross  Earnings. 

1 

State  and  Local 
Tax. 

Per  Cent,  of  Tax 

on 
Gross  Income. 

New  Eng.  States..'  $    46,942,000 
Middle          "       ..j      283,173,000 
Southern       "       ..!         49,172,000 
Western        "       ..1       130,608,000 
Pacific           "       ..          70,554,000 
Total 580,450,000 

$  1,601,000 

5,945,000 

616,000 

3,267,000 

1,855,000 

13,284,000 

3.4 
2.1 

1.3 
2.5 
2.6 

2.3 

In  Prussia,  the  General  Railway  Code  of  1838,  S.  39,  levies  a  tax 
on  railways  in  proportion  to  the  profits  on  the  total  capital  subscribed, 
after  deducting  all  the  expenses  of  repair,  the  cost  of  carr}'ing  on  the 
business,  and  the  yearly  sum  to  be  appropriated  to  the  reserved  fund. 


OWNERS   OF   NATURAL    MONOPOLIES.  205 

The  day  is  not  far  distant  when  State  and  munici- 
pal taxes  will  be  largely  if  not  entirely  defrayed  by 
the  taxes  levied  upon  corporations  owning  natural 
monopolies.  In  Vermont  for  many  years  the  rail- 
roads have  paid  all  State  taxes.  In  Wisconsin  and 
Mississippi  a  similar  plan  is  being  adopted.  The 
State  of  New  Jersey  also  has  recently  modified  her 
taxation  statutes  so  that  the  corporations  now  pay 
practically  all  of  the  State  taxes.  Such  also  is  the 
law  in  New  Hampshire.' 

There  is  also  a  tax  levied  upon  the  net  profit  after  deducting  manage- 
ment, maintenance,  working  expenses,  reserve  funds,  and  interest 
and  sinking  funds  U)  pay  off  loans.      The  rate  is  : 

If  net  profit  is  4  per  cent. — j^^  thereof, 

"     "       "     "  4  to  5  per  cent. — -^j^  thereof. 

'   5  to6  "        ••    -^V        " 

'  6  per  cent. — j'^j  thereof. 

The  tax  is  used  by  the  state  to  buy  the  stock  of  the  road,  and  thus  by 
degrees  the  state  becomes  its  owner. — Jeans  on  "  Railway  Problems," 
p.  174. 

'  See  Ely  on  "  Taxation,"  pp.  435,  436. 

At  an  early  period  the  State  of  Maryland  required  the  Baltimore 
and  Ohio  Railroad  to  agree  to  give  to  the  State  twenty  per  cent,  of  the 
gross  income  from  passenger  traffic  over  the  line  from  Baltimore  to 
Washington,  as  compensation  for  the  franchise  to  build  the  road. 
See  R.  R.  Co.,  vs.  Maryland,  21  Wall,  456  (1S74). 

In  the  city  of  New  York,  in  1888,  the  local  tax  on  the  corporations 
was  at  the  rate  of  1.9483  per  cent,  on  $57,623,060  making  a  tax  of 
$1,120,365.80.  The  whole  amount  of  tax  collected  was  $34, 329,860- 
12.  The  city  is  entitled  to  5  per  cent,  of  the  net  income  from  one 
of  the  elevated  railroad  companies.  In  i8Sg  the  city  received  from 
all  the  surface  and  elevated  railroads  $225,990,  in  addition  to  the 
regular  taxes.  Of  this  over  $80,000  was  for  unpaid  license  fees  for 
previous  years. 

The  total  State  taxes  levied  by  all  the  .States  and  Territories  in  1889 
were  $109,543,870.  Ely  on  "  Taxation,"  p.  453.  The  total  gross 
income  of  all  the  railroads  of  the  country  was  about  $1,000,000,000. 


2o6  THE   CORPORATION   PROBLEM. 

But  taxation  has  failed  to  restore  to  the  people  a 
fair  part  of  the  annual  income  from  natural  monopo- 
lies. Hence  another  remedy  has  been  tried.  In 
New  York,  in  1885,  the  bribery  of  the  board  of  alder- 
men, whereby  the  Broadway  street-railway  franchise 
worth  a  mxillion  dollars,  was  obtained,  led  to  a  popu- 
lar demand  for  a  change  in  the  laws.  Accordingly 
the  legislature  enacted  that  thereafter  all  street 
railway  franchises  should  be  sold  at  public  auction 
to  the  one  who  offered  the  highest  percentage  of 
the  gross  receipts/  This  statute,  has  checked  the 
building  of  lines,  yet  it  has  led  to  some  surprising 
results.  At  one  sale  the  successful  bidder  was 
obliged  to  give  26^  per  cent,  of  the  gross  annual 
receipts  to  the  city  in  order  to  get  the  franchise,  and 
in  another  sale  35  per  cent,  was  the  price  at  which 
the  franchise  was  sold.  It  is  safe  to  say  that  if  this 
statute  had  been  passed  fifty  years  ago  and  had 
applied  to  all  franchises  which  involve  a  natural  mo- 
nopoly, the  city  of  New  York  would  be  free  from 
debt  to-day  and  the  greater  part  of  the  expense  of 
governing  the  city,  which  is  now  upwards  of  thirty 
millions  of  dollars  annually,  would  be  met  by  the 
income  from  these  natural  monopolies.  The  present 
enormous  tax  of  about  two  per  cent,  on  all  taxable 
property  in  that  city  would  not  be  levied.^ 

1  See  Ch.  642  L.  1886,  as  amended  by  Ch.  622  L.  1887.  The  price 
must  be  at  least  3  per  cent,  for  the  first  five  years,  and  5  per  cent, 
thereafter. 

^  Comptroller  ISIyers,  of  the  city  of  New  York,  said,  in  October, 
1890,  that  "  it  would  pay  any  man  to  take  a  contract  to  run  the 
city  government  without  levying  any  taxes,  provided  he  could  get 
possession  of  all  the  franchises  which  the  city  had  in  former  times 


OWNERS    OF    XATURAI.    M()N( )!'(  )LIKS.  20/ 

But  there  is  an  improvement  which  should  be 
added  even  to  this  plan  of  a  public  sale  of  the 
franchises.  The  sale  should  be  for  a  specified  num- 
ber of  years  only — ten,  fifteen,  twenty,  or  twenty- 
five.  At  the  end  of  that  length  of  time  it  should  be 
provided  that  the  city  be  allowed  to  purchase  the 
property  at  the  actual  cost  of  replacing  the  plant,  or 
the  franchise  should  be  again  sold  at  public  auction, 
the  purchaser  to  purchase  the  old  property  at  the 
actual  cost  of  reproduction.  Such  is  practically  the 
plan  adopted  in  Louisiana,  England,  and  Canada.* 

given  away,  together  with  those  franchises  which  it  controls  to-day. 
I  stated  that  all  those  franchises  are  now  so  valuable  that  if  their 
present  incumbents  were  reasonably  taxed,  a  sufficient  revenue  would 
be  obtained  to  meet  the  expenses  of  city  government,  thus  permitting 
of  the  abolition  of  taxes  on  property." 

'  In  Louisiana,  where  after  twenty  years  the  street  railways  revert  to 
the  city,  the  estimated  value  of  the  plant  being  paid  to  the  company, 
the  city  at  the  expiration  of  the  twenty  years  may  sell  the  franchise. 
— Canal,  etc.,  R.R,  rs.  New  Orleans,  2  South  Rep.,  388  (1887). 

In  New  Orleans  alone  have  the  rights  of  the  public  been  carefully 
protected.  In  that  city  the  policy  of  granting  short  charters,  and,  at 
the  expiration  of  these  charters,  reselling  the  franchises  for  large 
amounts,  has  been  carefully  pursued.  The  New  Orleans  companies 
make  large  incomes  for  the  city,  are  run  cheaply,  have  little  wa- 
tered stock,  and  yet  pay  good  dividends.  In  1S86  the  sale  of  a 
single  franchise  met  nearly  one  eighth  of  the  total  municipal  expendi- 
tures for  the  year. 

In  Chicago  charters  granted  prior  to  1865  run  for  one  hundred 
years.  In  Cleveland  the  charters  are  perpetual,  and  practically  so 
in  Boston.  In  Philadelphia  and  Baltimore  the  charters  are  unlimited, 
but  the  city  may  buy  out  the  corjioration  at  the  end  of  the  first  or  any 
subsequent  fifteen  years. 

I'rofessor  Richard  T.  Ely,  in  Harper  s  Magazine,  July,  1887,  says  : 
**  All  charters  for  i)erforming  the  functions  of  a  natural  monopoly 
should  lie  limited  to  a  brief  period,  with  the  reversion  of  the  entire 
property  to  municipality,  stale,  or  federal  government,  either  without 


208  THE    CORPORATION    PROBLEM. 

But  the  most  effectual  remedy  is  that  each  city 
shall  own  all  of  the  street  railways,  water-works,  gas- 
works, electric  lights,  telegraph  and  telephone  lines, 
wharves  and  ferries  within  its  limits.  This  plan  is 
that  each  city  shall  own  them,  not  necessarily  for  the 
purpose  of  operating  them,  but  for  leasing  them  on 
short  periods  of  time.  In  Europe  such  a  mode  of 
owning  natural  monopolies  has  gone  much  farther 

compensation  or  with  compensation  at  an  appraised  valuation  for 
actual  outlays. '' 

In  Berlin  "the  street-car  lines  pay  a  portion  of  their  revenue  to 
the  city,  keep  the  streets  through  which  they  run  well  paved  from 
curb  to  curb,  and  in  igii  they  become  the  property  of  the  city  with- 
out compensation.  Had  New  York  City — a  municipality  of  about 
the  same  size — followed  this  example,  taxation  would  in  a  no  distant 
future  be  reduced  very  considerably,  and  fares  lowered  from  five  to 
three  or  even  two  cents.  ...  An  act  of  Parliament  allows  no 
municipality  to  grant  a  charter  to  a  street-car  company  or  an  electric- 
light  company  for  more  than  twenty-one  years,  and  it  must  always  be 
granted  with  the  reserved  right  of  purchase  before  the  expiration  of 
the  charter,  and  at  expiration,  with  compensation  for  land,  buildings, 
and  plant,  but  none  whatever  for  good-will,  expectation  of  future 
profits,  or  for  compulsory  purchase." 

A  striking  illustration  of  the  dangers  of  this  plan,  however,  is 
found  in  New  York  City.  The  City  every  few  years  gives  a  new 
lease  of  its  ferries,  the  last  lease  being  in  1S87,  by  which  the  city  was 
to  receive  12^  per  cent,  of  the  gross  revenues  from  the  operation  of 
the  ferries.  The  lease  provided  that  upon  its  termination  in  1891 ,  if  the 
old  lessees  did  not  take  a  new  lease  at  the  next  letting  in  i8gi,  the  new 
lessees  should  buy  the  plant  of  the  old  lessees  at  an  appraised  valua- 
tion, each  party  appointing  one  appraiser.  The  appraisers  were  ap- 
pointed and  valued  the  plant  at  $3,803,000.  This  figure  was  so  high 
that  no  one  except  the  old  lessees  could  afford  to  bid  at  the  letting  in 
i8gi.  Accordingly,  before  the  new  letting  was  made,  certain  parties 
who  wished  to  bid  caused  suit  to  be  instituted  to  set  aside  the  $3,803,- 
000  appraisement,  alleging  that  }j^i, 520^000  was  all  that  the  old  plant 
is  worth.     This  suit  is  still  pending. 


OWNERS   OF   NATURAL    MONOPOLIES.  209 

than  in  America.  There  are  comparatively  few  of 
the  American  cities  which  own  their  gas-works,  and 
none  at  all  which  own  their  street-car  lines.  New 
York  City  owns  its  water-works  and  most  of  the 
ferry  privileges,  and  is  acquiring  the  wharves.'  It 
leases  a  part  of  the  ferry  privileges.  But  for  the 
most  part  the  natural  monopolies  of  that  city  are 
owned  absolutely  by  corporations.  And,  indeed,  in 
all  American  cities  this  private  ownership  has  gone  to 
such  an  extent  that  the  most  advanced  and  vigorous 
thinkers  and  political  economists  of  the  times  are 
steadfastly  advocating  city  ownership  of  all  natural 
monopolies  within  city  limits. 

In    regard    to    this    movement   Professor  Warner 
says  : 

"  \Mien,  in  1S73,  Adolph  Wagner  read  before  the  German  Verein 
fiir  Socialpolitik  an  elaborate  paper  on  joint-stock  companies,  he 
made  many  suggestions  as  to  the  reform  of  cor])oration  law.  But 
he  concluded  by  defending  the  thesis  that,  while  the  reform  of 
corporation  law  was  indispensable,  this  alone,  however  perfectly 
accomplished,  could  not  suffice  to  eliminate  the  evils  of  corporate 
management  of  property  ;  he  contended  that  corporations  must  con- 
tinue to  be  mischievous  until  they  are  restricted  to  a  narrower  field  of 
activity  than  that  now  occupied  by  them  ;  that  the  State,  in  its  vari- 
ous branches,  must  assume  control  of  those  enterprises  that  are  of 
necessity  monopolies." 

The  New  York  Record  and  Guide  presents  the  fol- 
lowing facts  and  figures : 

' '  A  careful  estimate  has  been  made  which  seems  to  show  that  the 
people  of  this  country  are  paying  ten  per  cent,  annual  dividends  on 
$150,000,000  of  fictitious  gas  stock,  and  yet  our  cities  go  on  without 

*  In  1889  New  York  City  received  fi, 521,602  from  dock  and  ship 
rents. 
14 


2IO  THE    CORPORATION    PROBLEM. 

a  change  of  policy,  apparently  continuing  to  think  that  competition 
will  regulate  prices  in  business  where  competition  is  demonstrably 
nothing  but  an  expense  and  a  nuisance.  Only  five  cities  in  the  whole 
country  are  known  to  own  their  gas-works — Philadelphia  ;  Richmond, 
Danville,  Wheeling,  and  Alexandria,  Virginia.  Yet  of  these  five, 
the  one  that  has  managed  least  wisely  has  succeeded  in  obtaining  gas 
at  a  lower  rate  than  almost  any  of  the  cities  supplied  by  private  com- 
panies and  considerably  below  the  average  for  such  cities.  There  is 
no  example  of  sustained  and  healthy  competition  between  gas  com- 
panies in  the  United  States.  Even  a  '  gas  war  '  that  lasts  for  a 
considerable  time  is  merely  'a  fight  to  the  finish,'  and  duplicate  gas- 
plants  must  eventually  be  paid  for  by  double  dividends.     .     .     . 

"  AYe  published  some  time  ago  a  list  of  eighteen  cities  owning  and 
very  successfully  operating  their  own  electric-light  works,  Chicago 
beino-  one  of  the  number.  All  but  one  of  these  are  west  of  the 
Alleghanies. 

• '  If  we  desire  to  find  a  contrast  to  this  state  of  things  we  must  look 
outside  our  countr}',  but  need  not  look  farther  than  England.  Of 
the  155  tramways  in  the  United  Kingdom  twenty-seven  belong  to 
the  local  authorities,  yielding  an  annual  revenue  of  ;^8i,98o.  In  the 
financial  year  of  1S83-4,  which  is  the  last  for  which  the  figures  are  at 
hand,  the  amount  of  money  received  from  water-works  by  municipal 
boroughs  was  ^1,628,585  ;  by  urban  sanitary  districts,  ;^267,8io  ;  by 
rural  sanitary  districts,  £i(^,  166.  From  gas-works  the  municipal  bor- 
oughs received  ;^3,056,559  ;  the  urban  sanitary  districts,  ;,^307,489."  ' 

'^Prof.  E.  W.  Bemis,  in  a  paper  read  before  the  American 
Economic  Association  recently,  stated  that  nine  cities  now  own  and 
operate  gas-works  in  this  country  :  Philadelphia  ;  Wheeling,  West 
Virginia  ;  Bellefontaine  and  Hamilton,  Ohio  ;  Henderson,  Ken- 
tucky ;  and  four  cities  in  Virginia,  Richmond,  Danville,  Charlottes- 
ville, and  Alexandria.  Philadelphia  now  manufactures  gas  at  a  cost 
of  74  cents  per  thousand  feet,  or  if  five  per  cent,  interest  and  two 
per  cent,  as  taxes,  which  a  private  company  would  have  to  pay,  is 
included,  $1.02  per  thousand  feet.  The  cost  of  manufacturing  gas  in 
Richmond  is,  allowing  six  per  cent,  interest  and  two  per  cent,  for 
taxes,  $1.04  per  thousand  feet. 

It  seems  that  all  of  the  ferry  privileges  between  New  York  and 
Brooklyn  are  owned  by  New  York,  and  that  Brooklyn  has  no  interest 
therein.      This  ownership  runs  back  as  far  as  I730-      The   right  to 


OWNERS   OK   NATURAL    MONOPOLIES.  2ll 

Professor  VAv  said  in  l^osloii  in  Janu.iiy,   I  SS9 : 

*'  I  oppose  private  monopolies.  What  I  favor  is  the  management 
of  certain  monopolies  by  public  authorities  and  in  the  interests  of  the 
public.  Monopolies  are  the  field  for  j)ublic  activity.  Competitive 
pursuits  are  the  field  for  private  activity.  It  is  thus  that  I  draw  the 
line,  and  it  is,  as  I  hold,  clearly  and  sharply  drawn.  ...  I  will 
simply  enumerate  the  more  important  natural  monopolies  :  gas 
supply,  water  supply,  and  electric  lighting,  street  railroads  of  all 
kinds,  steam  railroads,  telegraphs,  telephones,  all  public  roads,  the 
e.xpress  business.  These  businesses  never  can  be  conducted  except  as 
monopolies,  and  any  phenomena  which  appear  like  competition  are 
temporar>'  and  illusor)-.  The  gas  business  ser^'es  well  as  illustration. 
I  suppose  competition  has  been  tried  over  a  thousand  times,  and  it 
never  has  yet  been  permanent,  and  it  can  be  demonstrated  almost 
mathematically  that  it  never  can  be  permanent.  .  .  .  Certain 
monopolies  are  local  in  their  nature — t'.^.,  street  cars,  electric  lights, 
gas  supply,  water  supply,  and  for  these  I  favor  the  principle  of 
municipal  self-help,  as  opposed  to  the  perpetual  interference  with 
private  corporations  which  render  these  ser\'ices.  There  are  two 
principles,  one  of  which  must  be  violated  in  these  matters.  One  is 
the  '  keep-out '  principle — the  other  is  the  '  let-alone  '  principle. 
The  keep-out  principle  means  that  government  should  not  perform 
industrial  functions.  The  let-alone  principle  means  that  government 
should  let  private  parties  manage  their  own  business  in  their  own 
way.  Now,  I  believe  in  this  let-alone  principle.  Its  violation 
brings  about  an  intermingling  of  private  and  public  interests  which  is 
most  demoralizing,  and  which  is  to-day  the  chief  cause  of  corruption 
in  public  life.  The  keep-out  principle  can  be  violated  with  greater 
safety.  I  say  then  that  cities  should  pursue  a  policy  looking  to  the 
ultimate  ov.nership  and  management  of  all  local  monopolies.  This  is 
most  intimately  connected  with  local  taxation.  One  of  two  methods 
may  be  pursued,  i.  These  monopolies  may  be  worked  for  a  profit, 
and  by  profits  taxes  may  be  reduced  ;  or,  2,  charges  may  be  reduced, 

operate  the  ferries  is  sold  every  ten  years  by  the  city  of  New  York  to 
the  highest  bidder.  The  present  operators  of  five  of  the  lines  pay 
12  3.^  per  cent,  of  the  gross  receipts  to  New  York.  In  the  year  i88q 
these  five  ferries  earned  $815,404.  New  York  received  from  ferry 
rents  in  1889,  $326,559. 


212  THE    CORPORATION    PROBLEM. 

and  increased  general  prosperity  will  furnish  a  more  plentiful  source 
of  taxes,  and  thus  allow  a  reduction  of  the  tax  rate.  Enormous  waste 
is  thereby  obviated.  .  .  .  Natural  monopolies  owned  and  con- 
trolled by  cities  always  work  well,  and  you  may  search  the  world  over 
for  an  exception.  .  .  .  The  worst  instance  of  municipal  works 
has  proved  better  than  ordinary  private  works,  and  probably  less 
demoralizing  politically.  .  .  .  Public  works  will  always  be  in 
politics.  The  only  question  is  whether  it  shall  be  open  and  above 
board  or  concealed.  ...  By  the  application  of  correct  principles 
in  the  treatment  of  natural  monopolies  we  could  have  reduced  taxes  in 
Baltimore  one  third,  I  suppose  in  New  York  two  thirds,  probably  in 
Boston  at  least  one  half." 

The  example  set  by  Birmingham,  England,  in  the 
way  of  city  ownership  and  operation  of  natural 
monopolies,  is  a  remarkable  instance  of  what  a  city  is 
capable  of.  That  city  has  recently  acquired  nearly 
all  of  the  natural  monopolies  within  its  limits.  The 
two  gas  monopolies,  which  had  supplied  the  citizens 
with  an  inferior  and  costly  article,  were  bought  out 
of  existence  and  consolidated  into  a  department  of 
the  city  council.  The  profits  to  the  city  are  about 
$100,000  a  year,  although  the  price  charged  is  sixty- 
two  and  fifty-eight  cents  per  thousand.  The  water- 
works are  owned  by  the  city.  The  street  railways  are 
leased  by  the  city  to  corporations.  The  city  lays 
down  the  tracks,  keeps  them  in  repair,  and  the  cor- 
porations pay  a  mileage  rent.  Overcrowding  is 
illegal  and  fines  are  imposed  for  violations. 

And  yet  there  are  grave  objections  to  all  this.  It 
may  be  true  that  if  these  natural  monopolies  were 
owned  by  the  cities,  the  people  would  get  the  income 
therefrom  ;  that  the  service  would  be  better ;  that  it 
would  be  cheaper ;  that  more  improvements  would 
be  made;   and  that   less   controversies  between   the 


OWNERS    OF    NATURAL    MONOPOLIES.  21 3 

corporations  and  the  i3eople  would  exist.  It  may  be 
true  that  the  income  from  tht?  natural  monopolies 
would  pay  municipal  debts,  pay  the  annual  expenses 
of  local  government,  build  great  public  improve- 
ments, and  reduce  the  rates  charged  for  service  to 
the  public. 

Notwithstanding  this  the  thoughtful  citizen  has 
doubts  about  the  expediency  of  such  a  course.  The 
making  or  saving  of  money  is  not  the  chief  aim  or 
end  for  which  government  is  given  power  by  the 
governed.  The  argument  against  the  centralization 
of  power  in  government  is  not  applicable  here, 
because  the  power  here  considered  is  that  of  the 
municipalities,  and  such  government  never  has  and 
probably  never  will  be  too  greatly  centralized.  But 
the  objection  is  that  such  a  bureaucratic  and  paternal 
system  of  government,  even  of  local  government, 
would  teach  the  American  people  to  look  to  and 
depend  upon  government  for  the  transaction  and 
regulation  of  business.  Worse  than  this,  the  mu- 
nicipal governments,  even  now,  with  their  limited 
power  and  patronage,  are  spectacles  of  unmitigated 
corruption  and  mismanagement,  and  it  seems  impos- 
sible to  wrest  them  from  lawless  bands  of  politicians. 
If  the  cities  acquired  all  of  the  natural  rrionopolies, 
these  too  would  become  subjects  of  plunder.  A 
city  government  would  then  become  the  El  Dorado 
of  political  freebooters  and  mountebanks. 


CHAPTER    V. 

TRUSTS. 

Causes  of  trusts — Definition  and  explanation  of  the  various 
kinds  of  trusts — The  legality  of  trusts — The  tendency 
of  business  towards  large  concerns^  combinations^  and 
consolidation — Are  trusts  to  be  justified  as  a  legitimate 
mode  of  doing  business  on  a  large  scale  ? —  The  monopoly 
feature  of  trusts — Transformation^  reorganization,  and 
disappearance  of  trusts  iiito  large  corporations. 

CAUSES    OF    TRUSTS. 

During  the  past  fifteen  years  there  has  been  a 
rapid  growth  of  manufactories.  This  growth  has 
extended  into  all  branches  of  manufacturing  business. 
It  has  created  competition,  caused  an  over-produc- 
tion, and  reduced  prices  frequently  below  the  cost 
of  the  article  produced.  Several  years  ago  it  became 
evident  to  manufacturers  that  they  must  pursue  one 
of  two  courses.  They  must  continue  the  war  of 
prices  until  the  weaker  concerns  went  to  the  wall 
and  a  few  great  establishments  arose  on  the  ruins,  or 
they  must  combine,  limit  production,  and  control 
prices.     The  latter  plan  was  adopted.     - 

There  are  other  causes  at  work.  America  has 
been   and    is   increasing    in    population    and    wealth 

214 


TRUSTS.  215 

with  wonderful  rapidity.  The  imperial  destiii)'  of 
the  country  is  manifest.  It  is  becomin<^  the  com- 
mercial centre  as  well  as  the  ^^ranary  of  the  world. 
Its  sixty-three  millions  of  people  consume  an  amount 
of  manufactured  products  which  is  growing  year  by 
year.  As  a  result  the  manufacturing  industries  have 
been  developed  witli  remarkable  speed.  This  fact 
has  put  into  vigorous  operation  the  law  of  trade,  that, 
as  an  industry  grows  in  \olume,  it  tends  to  centralize 
and  become  focused  into  great  establishments.  This 
is  natural,  because  the  great  establishments  produce 
in  large  quantities  and  thus  produce  more  cheaply ; 
they  buy  raw  material  more  cheaply,  save  in  expense 
of  selling,  utilize  inventions,  employ  the  best  talent, 
and  they  can  sell  at  prices  which  ruin  and  drive  out 
the  smaller  concerns.  The  talent,  business  capacity, 
carefully  invested  capital,  energy',  and  reliability  of 
great  concerns  give  them  the  supremacy.  Hard 
times  may  intensify  and  shorten  the  struggle. 
Close  competition  may  for  a  time  prevent  profits  and 
even  cause  a  loss  to  all.  But  sooner  or  later  the 
weaker  concerns  drop  out,  prices  are  restored  to  a 
normal  basis,  competition  between  the  surviving 
g^eat  houses  prevent  an  undue  enhancement  of 
those  prices,  and  trade  settles  down  to  a  healthy 
basis — fair  to  the  public,  and  fair  to  itself.  Such 
has  been  the  history  of  European  manufacturing 
industries,  and  such  is  the  natural  development  of 
all  productive  enterprises.  It  is  so  with  the  mining 
and  mercantile  business,  with  water  transportation, 
banking,  and  manufacturing.  It  is  the  law  of  nature 
and  of  trade. 


2l6  THE   CORPORATION   PROBLEM. 

These  two  causes — too  many  concerns  and  the 
natural  tendency  of  all  large  business  to  concentrate 
— were  enough  ultimately  to  bring  about  the  rise  of 
great  concerns  in  each  branch  of  business  and  the 
fall  of  the  small  competitors.  The  fact  is,  that 
competition  is  a  benefit  not  only  to  the  consumer 
but  also  to  the  deserving  producer,  the  manufacturer. 
To  the  consumer  it  gives  reasonable  prices.  To  the 
manufacturer  it  is  a  benefit  by  periodically  winding 
up  the  decrepit  and  incapable  concerns.  A  vigorous 
and  growing  manufacturing  establishment  has  no 
need  to  fear.  It  may  at  times  have  its  profits  cut 
down  by  low  prices  caused  by  excessive  competition, 
but  after  the  tottering  and  worn-out  concerns  have 
gone  to  the  wall,  trade  revives  on  a  new  and  paying 
basis. 

But  the  natural  process  was  not  fast  enough  for 
the  restless  American.  The  law  of  the  survival  of 
the  fittest  works  too  slowly  for  his  temperament. 
Instead  of  allowing  the  weak  concerns  to  die,  and 
the  strong,  talented,  energetic  ones  to  survive,  he 
has  stopped  the  workings  of  the  natural  laws  of 
trade  and  has  substituted  his  own  makeshift.  And 
his  device  has  been  bold  and  swift.  It  is  the  device 
of  trusts. 

The  trust  has  been  a  creation  of  very  recent  times 
and  one  of  the  chief  reasons  why  so  many  adopted 
this  remarkable  mode  of  combination  was  that  a 
great  monopoly  in  oil  had  devised  it  and  had  pros- 
pered. This  monopoly  in  oil  had  amassed  millions 
of  money,  and  had  practically  crushed  out  all  com- 
petition.    It  had  succeeded  beyond  the  dreams  even 


TRUSTS.  217 

of  those  who  originated  it,  and  had  worked  out  the 
trust  plan  and  poHcy  of  organization.  The  Standard 
Oil  Trust  proved  a  success,  and  the  mode  of  organi- 
zation which  it  adopted  set  an  example  for  manu- 
facturers which  they  were  not  slow  to  follow. 

DEFINITION    AND    EXPLANATION    OF    THE    VARIOUS    KINDS 

OF    TRUSTS. 

A  trust  is  a  combination  of  many  competing  con- 
cerns under  one  management,  which  thereby  reduces 
the  cost,  regulates  the  amount  of  production,  and 
increases  the  price  for  which  an  article  is  sold.  It  is 
a  monopoly  or  an  endeavor  to  establish  a  monopoly. 
Its  purpose  is  to  make  larger  profits  by  decreasing 
cost,  limiting  production,  and  increasing  the  price  to 
the  consumer.  This  it  accomplishes  by  presenting 
to  competitors  the  alternative  of  joining  the  trust 
or  being  crushed  out. 

The  term  trust  has  been  popularly  applied  to 
all  of  the  modes  of  effecting  combinations.  These 
combinations  have  varied  in  their  organization,  ac- 
cording to  the  property  involved,  the  objects  to 
be  attained,  and  the  willingness  of  the  parties 
to  place  their  property  in  the  hands  of  others. 
Hence  it  is  that  many  different  plans  of  combining 
have  been  attempted.  The  first  plan  was  by  con- 
tracts, whereby  all  the  parties  were  to  sell  at  a  fixed 
price  or  through  a  common  agent.  Five  years  ago 
these  contracts  existed  in  many  branches  of  business. 
They  corresponded  in  principle  and  purpose  to  the 
railroad  pools,  but  like  them  they  were  a  failure. 
The  courts  would  not  enforce  or  sustain  them,  and 


2l8  THE   CORPORATION   PROBLEM. 

the  members  would  not  live  up  to  them.  They  were 
short-lived.  The  parties  would  not  act  in  good 
faith.  Secret  breaches  were  made,  or  the  whole 
agreement  was  openly  repudiated.  They  fell  to 
pieces.  Self-interest  was  the  only  cohesive  bond, 
and  self-interest  sooner  or  later  induced  one  or  more 
to  abandon  and  compete  with  the  combination  pool. 

It  became  evident  that  a  stronger  method  of  effect- 
ing a  combination  must  be  found.  It  must  be  a 
method  which  would  bind  fast  all  who  once  entered 
into  it.  It  must  take  the  management  and  owner- 
ship of  the  business  out  of  the  hands  of  the  various 
discordant  elements  which  constituted  the  combina- 
tion. It  must  be  based  not  on  a  moral  obligation 
or  mere  agreement,  but  on  an  absolute  right  of 
property,  possession,  and  ownership,  vested  in  the 
combination  itself.  The  old  method  of  combination 
had  failed,  because  it  required  the  continuous  assent 
of  its  numerous  members.  The  new  combination 
could  succeed  only  by  depriving  the  parties  of  the 
power  to  withdraw  their  assent.  A  scheme  that 
would  fulfil  these  requisites  was  not  easy  to  discover. 
But  it  was  found,  and  exists  in  the  latest  form  of 
trusts. 

This  latest  and  perhaps  most  efficient  method  of 
organizing  the  trust  is  for  each  of  the  parties  to 
incorporate  his  own  establishment.  The  stock 
of  these  various  corporations  is  then  turned  over 
to  certain  persons  called  trustees.  In  payment 
therefor  the  trustees  issue  to  each  party  trust  cer- 
tificates, similar  to  shares  of  stock  in  corporations. 
By   these   exchanges  the   trustees   hold   a   majority 


TRUSTS.  219 

or  all  of  the  stock  of  each  of  the  separate  corpora- 
tions. The  trustees  thereby  elect  the  directors, 
place  their  agents  in  charge,  prevent  all  clashing 
of  interests,  and  so  control  the  market.  They  then 
have  the  power  to  cause  one  concern  to  be  closed, 
limit  the  production  of  another,  consolidate  the 
different  establishments,  or  centralize  production  at 
one  point.  The  various  parties  are  not  injured 
thereby,  since  their  part  of  the  profits  comes  from 
the  whole  trust,  and  not  from  their  particular  estab- 
lishment. The  trustees  are  annually  elected  by  the 
certificate  holders.  The  trust  certificates  themselves 
are  watered  up  to  a  point  where  the  vast  profits 
of  the  trust  will  make  only  a  reasonable  dividend  on 
all  the  trust  certificates  which  have  been  issued. 
These  certificates  are  bought  and  sold  on  the  market 
like  shares  of  stock. 

The  Standard  Oil  Trust,  the  American  Cotton-Oil 
Trust,  and  the  Sugar  Trust  have  been  the  most 
[prominent  examples  of  this  mode  of  forming  a  trust. 

The  term  trust  has  also  been  applied  to  any  great 
corporation  that  has  been  formed  to  purchase  the 
copcerns  of  many  competitors  in  a  particular  line  of 
business.  The  most  celebrated  of  this  class  of  cor- 
porations is  the  Diamond  Match  Company.  It  pur- 
chased and  still  owns  nearly  every  match  manufactory 
in  this  country.  Such  a  corporation  is  a  combination, 
and  its  purposes  are  the  same  as  those  of  the  regular 
trust.  It  differs  essentially,  however,  from  the  lat- 
ter in  certain  particulars.  These  particulars  will  be 
pointed  out  hereafter. 

There  are  still  other  uses  for  the  word  trust.     In 


220  THE    CORPORATION    PROBLEM. 

England  it  is  applied  to  a  legitimate  investment  en- 
terprise, where  the  trustees  are  authorized  to  invest 
the  funds  of  the  trust  in  the  stocks  and  bonds  of 
miscellaneous  corporations,  the  amount  invested  in 
any  one  company  being  generally  hmited.  That 
which  is  lost  in  one  investment  is  expected  to  be 
made  up  by  large  profits  in  another.  It  is  a  mode 
of  investment  on  a  large  scale,  and  is  conducted  on 
the  principle  of  an  average  gain  or  loss.  Again,  in 
America  the  American  car  trust  exists,  and  this  also 
is  unobjectionable  in  its  operations  and  plans.  It 
is  practically  an  agreement  of  several  owners  of  cars 
to  place  them  in  the  hands  of  an  agent  to  sell  on  the 
instalment  plan,  the  agent  having  the  power  to  issue 
certificates  representing  an  interest  in  the  instalments. 
In  America  also  there  has  arisen  the  railroad  voting 
trust.  Such  a  trust  is  created  by  transferring  a 
majority  of  the  stock  of  the  railroad  company  to 
trustees,  who  shall  vote  it  and  hold  it,  but  shall  issue 
trust  certificates  therefor  to  the  parties  who  turn  in 
their  stock  to  form  the  trust.  The  objection  to  such 
a  trust  as  this  is,  that  it  gives  power  without  re- 
sponsibility. 

The  Reading  Railroad  is  controlled  and  its  officers 
elected  by  a  voting  trust  of  this  kind.  The  Railroad 
Gazette,  speaking  of  the  proposed  voting  trust  for  the 
Atchison,  Topeka,  &  Santa  Fe  Railroad,  has  said  : 

"  A  trust,  in  this  sense  of  the  word,  is  an  arrangement  by  which 
the  stockholders  part  with  their  voting  power  for  a  term  of  years,  and 
during  that  time  lose  all  control  over  the  management.  The  object 
of  such  a  scheme  is  to  protect  each  individual  investor  from  the  effect 
©f  changes  of  policy  which  might  arise  if  a  majority  interest  in  the 


TRUSTS.  221 

stock  should  change  hands.  In  an  ordinary  corporation  this  is  an 
ever  present  liability.  But  if  the  stock,  or  a  majority  of  such  stock, 
is  placed  in  the  hands  of  trustees,  who  give  in  return  a  set  of  trust 
receipts  entitling  the  holder  to  all  dividends  on  his  stock,  the  invest- 
ment and  the  management  become  separated.  If  the  trust  receipts 
change  hands  the  dividends  go  to  the  new  holder  ;  the  management 
remains  where  it  was  before,  namely,  under  the  control  of  the  trustees. 
"  Such  is  the  recognized  character  and  purpose  of  voting  trusts. 
Their  object  is  to  secure  permanence  of  management  without  sacrificing 
transferability  of  shares. 

"  The  opposition  to  a  proceeding  of  this  kind  is  usually  based  on 
legal  technicalities.  But  it  really  has  wider  and  stronger  economic 
ground.  If  a  concern  is  owned  and  managed  by  its  stockholders,  the 
power  and  responsibility  belong  in  the  same  hands.  If  some  of  the 
existing  owners  secure  permanent  tenure  of  management  by  means  of 
a  trust,  and  then  sell  their  interest  as  investors  to  others,  power  and 
responsibility  are  at  once  separated.  If  a  man  wishes  to  make  him- 
self trustee  in  his  own  behalf,  there  is  often  a  presumption  that  he 
wishes  to  retain  the  power  and  avoid  the  responsibility,  and  that  his 
motives  in  so  doing  are  questionable.  Looked  at  from  the  standpoint 
of  the  community,  the  gain  in  stability  of  management  is  more  than 
offset  by  the  loss  of  safeguards  against  mismanagement.  From  this 
point  of  view  a  voting  trust  is  wrong  in  principle."  ' 

'  The  same  article  goes  on  to  say,  however,  that  where,  as  in  the 
case  of  a  railroad  like  this,  the  stock  is  worth  only  one  seventh  of  the 
whole  value  of  the  property,  a  different  question  arises  : 

"  Under  these  circumstances  the  trust  seems  to  afford  the  best  and 
simplest  means  of  giving  the  bondholders  an  assurance  that  the  road 
will  be  run  in  their  interest.  Instead  of  offering  chances  for  dishonest 
manipulation,  it  goes  far  to  remove  them.  Instead  of  separating 
power  and  responsibility,  it  may  really  tend  to  unite  them.  If  the 
result  proves  good  it  is  not  unlikely  to  furnish  a  precedent  for  subse- 
quent reorganizations. 

'*  Had  our  railroads  been  built  with  stock  instead  of  bonds  the 
question  would  not  have  come  up  in  its  present  form.  Had  the  stock- 
holders furnished  three  (juarters  of  the  capital,  as  is  the  case  in  Eng- 
land, it  is  doubtful  whether  a  railroad  trust  of  this  kind  could  be 
justified  on  grounds  of  public  policy.     If  investment   and    manage- 


222  THE   CORPORATION    PROBLEM. 

A  trust  of  this  kind  prevents,  the  owner  of  stock 
from  voting  the  stock,  and  for  this  reason  it  is  gener- 
ally dissolved  by  the  courts  upon  the  application  of 
a  trust-certificate  holder. 

But  the  original  and  simon  pure  trust  is  a 
unique  piece  of  handiwork.  It  is  well  fitted  to 
baffle  investigation  and  to  work  out  its  schemes 
secretly,  silently,  and  effectively.  Its  structure  bears 
witness  to  the  ingenuity  displayed  in  its  construc- 
tion. It  is  a  labyrinth  that  is  a  puzzle  to  the  inves- 
tor and  a  peril  to  the  public.  It  controls  the  wealth 
and  concentrated  power  of  a  corporation,  but  for 
the    most   part    avoids    the  publicity  and  restraints 

ment  were  actually  in  the  same  hands,  there  would  be  no  good  excuse 
for  separating  them.  But  they  are  not  in  the  same  hands.  They  are 
already  separated  by  the  existence  of  the  large  investment  in  the  form 
of  bonds,  whose  owners  have  no  direct  voice  in  the  management." — 
Railroad  Gazette,  January  3,  1890. 

A  still  different  and  yet  peculiar  trust  is  the  Wisconsin  Central 
Company.  It  is  a  corporation  formed  for  the  purpose  of  purchasing 
and  holding  shares  of  stock  in  railroad  corporations.  It  controlled 
about  eight  hundred  miles  of  railroad,  and  recently  has  leased  its 
lines  to  the  Northern  Pacific  Railroad  Company.  "  It  is  organized 
under  the  several  laws  of  the  State  of  Wisconsin,  but  operates 
in  the  same  way  that  the  trusts  do,  and  is  in  fact  a  trust.  The 
stocks  and  bonds  of  the  various  companies  acquired  are  vested  in 
the  trustees,  who  issue  their  non-voting  trustee  certificate  against 
them.  The  trustees  have  power  to  fill  vacancies  in  their  own  body 
upon  the  joint  nomination  of  the  surviving  trustees,  approved  in 
writing  by  the  holders  of  a  majority  of  the  stock  of  the  company 
covered  by  the  trustees'  certificates,  both  common  and  preferred. 
This  approval  is  the  only  interference  in  the  affairs  of  the  company 
allowed  from  outside  the  trustees,  who  are  empowered  to  vote  '  for 
all  purposes  whatsoever,  upon  every  question  raised  at  each  and  every 
meeting  of  said  company,  M'hether  annual  or  special.'  " 

The   Richmond  &  West   Point   Terminal   Railway  &  Warehouse 


TRUSTS.  223 

which  ii  wise  pubHc  poHcy  has  placed  upon  corporate 
acts.  It  is  a  skilfully  constructed  intricate  machine, 
and  is  the  product  of  the  highest  order  of  business 
talent  and  executive  ability. 

One  of  the  chief  objects  of  organizing  a  trust 
instead  of  a  single  great  corporation  is  that  by  the 
trust  the  business  is  subdivided  into  many  parts, 
and  the  insolvency  or  rascality  of  one  of  the  con- 
stituent companies  does  not  bring  ruin  upon  the 
entire  enterprise.  It  is  admirably  constructed  for 
use  as  an  irresponsible  and  "  dark-lantern  "  affair. 
Its  proceedings,  books,  and  operations  are  not  open 
to  the  public,  nor  certificate  holders,  nor  creditors. 
The  law  has  placed  certain  safeguards  around  corpo- 

Company  is  also  a  corporation  owning  the  stocks  of  other  companies. 
The  Railroad  Gazette  of  January  1 1,  1 889,  says  in  regard  to  it : 

"  The  dangers  involved  in  the  form  of  combination  of  which  the 
Richmond  cV  West  Point  is  the  most  prominent  type  are  to  be  looked 
for  in  other  directions.  This  company  is,  in  substance,  a  financial 
concern  which  controls  railroads  by  ownership  of  a  majority  of  their 
securities.  The  Pennsylvania  and  other  roads  have  done  the  same 
thing  in  times  past,  but  the  difference  is  that  the  Pennsylvania  is  a 
railroad  while  the  Richmond  &  West  Point  is  not.  This  gives  the 
operations  of  the  last  named  company  a  more  distinctively  financial 
character.  It  also  creates  a  danger  that  minority  rights  may  be 
sacrificed  for  financial  purposes.  Not  that  the  Richmond  &  West 
Point  has  done  so  ;  its  conduct  in  this  respect  has  been  so  straightfor- 
ward as  to  l)e  an  important  element  in  its  success.'  The  continuance 
of  Gen.  -\lexander  in  the  presidency  of  the  Georgia  Central  gives 
added  reason  to  believe  that  this  policy  will  continue.  But  there  is 
none  the  less  a  possibility  of  great  evil  in  this  direction,  and  we  trust 
that  the  courts  will  see  the  danger,  and  the  necessity  of  throwing 
additional  safeguards  over  the  rights  of  minority  stockholders.  Apart 
from  such  protection,  a  minority  stockholder  in  a  case  like  this  is  even 
more  helpless  than  he  is  anywhere  else." 


224       THE  CORPORATION  PROBLEM. 

rations.  But  the  trust  gives  practically  absolute 
power  to  the  trustees,  and  these  trustees  act  secretly 
and  silently,  and  refuse  to  give  information  even  to 
the  certificate  holders  themselves.  They  are  neither 
corporations  nor  well-defined  common-law  trusts  ; 
no  charter  or  statements  need  be  filed  for  public 
inspection  ;  no  reports  need  be  made  or  published  ;  it 
may  carry  on  any  business  it  desires  ;  the  principles 
of  ultra  vires  acts  do  not  check  it  ;  no  limit  is  placed 
by  statute  on  its  capital  stock  ;  no  law  prevents  an 
increase  or  decrease  of  its  trust  certificates  ;  no  tax 
is  laid  on  its  charter  or  franchises  or  capital  stock  ; 
no  limit  is  placed  by  the  public  on  the  powers  and 
discretion  of  its  trustees  ;  no  publicity  is  given  to  its 
acts  ;  and  there  is  no  liability  for  debts.  It  may 
move  from  State  to  State  ;  it  may  evade  taxation, 
and  defy  the  powers  of  courts  ;  and  yet  it  may  act 
secretly,  silently,  and  with  all  the  enginery  of  irre- 
sponsible power  and  unlimited  wealth.  It  has  been 
well  said  that  power  without  responsibility  is  the 
darling  of  the  human  heart.  The  trustees  of  some 
of  the  modern  trusts  possess  it.  They  have  practi- 
cally no  limit  placed  upon  their  powers  in  conduc- 
ting the  business  ;  no  necessity  of  accounting  and 
disclosing  the  condition  of  things  ;  and  no  lack  of 
opportunity  to  use  their  information  for  the  purpose 
of  making  a  fortune  on  the  stock  exchange. 

THE    LEGALITY    OF    TRUSTS. 

There  is  no  longer  any  doubt  that  a  trust 
formed  by  a  combination  of  manufacturers  is  ille- 
gal.   The  decisions  are  clear  and  emphatic.    There  is 


TRUSTS.  22$ 

a  long  line  of  cases  to  this  effect  running  back  to  Lord 
Coke,  who,  in  the  famous  Case  of  the  Monopolies, 
said  that  there  were  three  inevitable  results  of  mo- 
no]DoIy  :  "  ( i)  That  the  price  of  tlie  same  commodity 
will  be  raised  ;  (2)  that  the  commodity  is  not  so 
good  as  before  ;  (3)  that  it  tends  to  the  impoverish- 
ment of  divers  artisans,  artificers,  and  others." 

The  recent  decisions  in  Illinois  against  the  Chicago 
Gas  Trust,  and  in  New  York  against  the  Sugar  Trust 
are  to  the  same  effect.  The  State  will  annul  the 
charter  of  any  corporation  that  unites  or  is  united 
with  another  corporation  in  forming  a  trust.  The 
law  declares  that  such  combinations  are  against  pub- 
lic policy  and  are  illegal  and  void.  The  courts  have 
set  a  face  of  adamant  against  the  trusts,  and  their 
days  are  numbered.  Men  cannot  afford  to  be  doing 
business  in  an  illegal  way.  Moreover,  the  express 
ban  of  the  law  is  being  put  upon  them.  Congress 
in  1890  enacted  a  statute  against  them;  fourteen 
of  the  States  of  the  Union  have  passed  similar  laws 
during  the  past  two  years,  and  five  other  States  by 
constitutional  enactments  have  prohibited  trusts 
absolutely  and  in  unmistakable  terms. 

THK  TENDENCY  OF  BUSINESS  TOWARDS  LARGE  CONCERNS, 
COMBINATIONS,   AND  CONSOLIDATIONS. 

The  industries  of  America  are  expanding  with 
the  growth  of  the  wealth  and  population  of  the 
country  itself.  A  nation  that  doubles  its  popula- 
tion every  twenty-five  years,  and  its  wealth  in  still 
less  time,  necessarily  has  a  trade  that  grows  to 
immense    proportions.     As    already    remarked,    the 


226  THE    CORPORATION    PROBLEM. 

natural  development  of  such  a  trade  causes  great 
establishments  to  supplant  the  numberless  small 
ones.  It  is  a  law  of  nature.  These  great  establish- 
ments arise  gradually  by  the  course  of  trade  and  the 
genius  of  particular  individuals,  or  they  are  hastened 
in  their  formation  by  the  combinations  and  consoli- 
dations of  competing  concerns.  If  they  arise  by  the 
former  process,  they  contain  no  dead  limbs,  but 
every  part  is  replete  with  vigorous,  healthful  life. 
If  they  arise  by  the  latter  process,  by  combination  or 
consolidation  of  competing  concerns,  some  of  those 
concerns  are  generally  weak  and  decayed,  and  to 
this  extent  the  great  establishment  is  crippled. 

It  is  best  to  be  candid  and  fair  in  considering  a 
subject  which  has  been  the  occasion  of  such  wide 
discussion,  intense  feeling,  and  bitter  litigation.  It 
is  an  established  principle  of  economics  that  the  dis- 
placement of  numberless  small  concerns  by  large 
ones  is  not  only  a  natural  process  but  is  beneficial  in 
its  results.  These  great  concerns  arise  because  by 
doing  business  on  a  large  scale  they  can  do  it  more 
cheaply  ;  they  not  only  can  manufacture  more 
cheaply  but  can  sell  more  cheaply ;  they  use  ma- 
chinery and  improved  processes  ;  investigate,  experi- 
ment, and  develop  inventions  which  are  beyond 
the  reach  of  individuals  or  small  organizations ; 
utilize  in  every  w^ay  the  modern  forces  of  steam, 
electricity,  machinery,  and  capital  ;  produce  and 
distribute  on  a  vast  scale ;  combine  capital  and 
engage  skilled  persons  ;  add  factory  to  factory ;  use 
every  device  that  cheapens  products ;  reduce  the 
cost  of  transportation  ;   dispense  with  multitudes  of 


TRUSTS.  227 

officers,  superintendents,  ira\elling  salesmen,  and 
expensive  advertisements;  purchase  raw  materials 
at  low  figures;  employ  the  highest  order  of  admin- 
istrative abilit)' ;  prevent  over-production  ;  ensure 
certain  returns  on  capital  ;  prevent  insolvencies  ;  and 
build  up  large  and  new  enterprises  which  require 
great  capital,  incur  great  risks,  and  call  for  the  best 
administratixe  talent.  These  are  the  reasons  why 
in  the  natural  course  of  events,  the  great  establish- 
ments displace  the  small  ones.  America  is  now 
going  through  this  process,  and  her  industries  are 
being  revolutionized. 

It  has  become  clear  that  the  natural  growth  and 
existence  of  great  concerns,  doing  all  or  most  of  the 
business  in  a  particular  line,  are  a  benefit - 

ARE  TRUSTS  TO  BE    JUSTIFIED  AS  A  LEGITIMATE  MODE  OF 
DOING  BUSINESS  ON  A  LARGE  SCALE  ? 

Nevertheless  all  this  does  not  lead  to  the  conclu- 
sion that  the  artificial  formation  of  those  great 
concerns  by  the  combination  or  consolidation  of 
man}-  competitors  is  a  benefit.  There  are  legitimate 
and  there  are  illegitimate  methods  of  combining 
capital.  It  is  true  that  the  wonderful  success  of 
modern  business  is  dependent  upon  combination ; 
that  by  combination  capital  is  obtained,  enterprises 
of  magnitude  conducted,  great  results  accomplished  ; 
and  that  every  partnership  and  every  corporation  is 
a  combination.  But  these  arguments  do  not  justify 
the  trust  mode  of  combination  any  more  than 
arguments  in  favor  of  a  standing  army  would 
justify  the    existence  of    a    band   of    bandits.     The 


228        THE  CORPORATION  PROBLEM. 

trust  is  a  nefarioiis  mode  of  forming  a  few  great 
establishments — nefarious  because  those  estabhsh- 
ments  arise,  not  by  outstripping  competitors  through 
a  reduction  of  cost  and  of  prices,  but  by  destroying 
competition  and  making  possible  still  higher  prices. 
And  they  are  unnatural  creations  in  that  they  load 
down  the  vigorous  and  prosperous  concerns  with  the 
weight  of  the  unprofitable  and  failing  ones.  The 
law  of  the  survival  of  the  fittest  in  manufacturing  is 
one  thing  ;  the  trust  plan  of  turning  strong  establish- 
ments into  a  poorhouse  for  the  preservation  of 
weak  concerns  is  quite  a  different  thing.  There  is 
less  progress  under  the  latter  than  under  the  former 
law.  If  competition  is  allowed  to  do  its  work,  the 
capable  concerns  survive  ;  they  are  not  handicapped 
by  the  weak ;  they  eventually  reduce  the  cost  of 
production  to  the  lowest  possible  limit  ;  they  are 
obliged  to  create,  seek,  and  use  new  inventions  and 
processes  of  manufacture  ;  they  can  afford  to  sell 
cheaper  because  they  can  produce  cheaper,  and  they 
are  obliged  to  sell  cheaply  in  order  to  prevent  the 
rise  of  new  and  strong  competing  concerns.  In 
short,  the  trust  is  not  a  natural  mode  of  doing 
business  on  a  large  scale.  It  is  not  to  be  justified  as 
a  natural  development  of  trade.* 

'  In  reply  to  the  argument  that  the  massing  of  capital  in  the  form  of 
trusts  "has  made  it  possible  to  organize  industrial  enterprises  on  a 
scale  so  extensive,  and  to  employ  labor-saving  machinery  so  largely, 
ihat  the  cost  of  production,  including  the  cost  of  transportation  to 
markets,  has  been  enormously,  almost  incredibly,  reduced  within  the 
last  twenty  years,"  a  Pittsburg  journal  says  :'  "  The  benefits  of  the 
massing  of  capital  in  cheapening  the  cost  of  production  and  trans- 
portation,  although  it    is  often  cited  to  defend    the  trusts,  has  no 


TRUSTS.  229 

THE    MONOPOLY    FEATURE    OF     TRUSTS. 

A  trust  is  an  organized  effort  to  establish  a 
monopoly.  This  is  its  chief  object,  and  if  it  were 
not  for  the  prospect  of  making  this  monopoly  more 
or  less  complete,  the  trust  would  not  be  formed. 
It  is  idle  for  its  defenders  to  say  that  the  trust  is 
created  in  order  to  cheapen  the  cost  of  manufacture 
and  reduce  the  price  to  the  public.     Incidentally,  in 

cogency  for  three  reasons  :  (i)  The  corporation  laws  of  the  country 
afTi)rd  abundant  opportunity  for  the  concentration  of  capital  neces- 
sary to  perform  any  industrial  operation,  and  no  one  objects  to  the 
incorporation  of  either  $25.ooo,cxx)  honest  and  unwatered  capital  to 
build  a  railroad,  or  $25,000  to  build  a  factory.  (2)  No  trust  puts 
any  new  capital  into  an  industrial  enterprise,  but  only  combines  the 
capital  already  existing  for  purpose  of  preventing  competition  and 
exacting  arbitrary  profits.  (3)  Except  for  the  illegitimate  profits 
secured  by  the  suspension  of  competition,  the  trust  organization 
produces  no  saving,  but,  on  the  contrary,  takes  away  the  penalty  of 
waste,  negligence,  and  recklessness,  as  has  already  been  shown  by 
recent  disclosures." 

Chauncey  M.  Depew,  in  an  address  before  the  International 
Brotherhood  of  Engineers,  in  Pittsburg,  Pa.,  in  October,  1890,  said: 

"In  the  United  States  our  pace  is  so  rapid  and  our  development 
so  phenomenal,  that  without  due  consideration  we  rush  rapidly  to  ex- 
tremes. This  is  true  both  of  capital  and  labor.  The  money  required 
to  construct  telegraphs,  to  build  railroads,  to  establish  banks,  was 
beyond  the  power  of  the  individual,  and  so  the  State  permitted  ag- 
gregated capital,  representing  the  contributions  of  many,  to  perform 
these  works.  At  the  same  time,  through  commissions,  departments, 
and  State  officers,  the  hand  of  the  government  was  constantly  upon 
them  for  the  protection  of  the  public  against  extortion  or  discrimina- 
tion. But  within  a  few  years  everything  from  pine  lands  to  peanuts, 
and  from  steel  rails  to  sardines  has  been  organized  into  some  form  of 
corporation  or  trust.  This  universal  effort  to  absorb  the  individual, 
to  divide  the  people  into  employing  companies  and  employees,  and 
to    destroy    competition    Mill     inevitably    end    in    disaster.      Hostile 


230  THE   CORPORATION    PROBLEM: 

a  few  rare  cases,  both  of  these  results  occur.  But  the 
chief  object  of  a  trust  is  a  monopoly  of  the  market. 

A  monopoly  of  the  market  means  a  control  of 
prices,  and  such  a  control  is  always  unjust  and 
oppressive,  whether  created  by  a  king  or  by  a 
combination  of  men.  It  raises  prices,  persecutes 
those  who  refuse  to  come  into  the  combination, 
crushes  out  competition,  punishes  or  ruins  single 
independent  producers,  lowers  the  price  paid  for 
raw  material,  restricts  production,  and  renders  fair 
competition  impossible. 

Sir  John  Colepepper,  in  a  speech  in  the  Long 
Parliament,  thus  spoke  of  monopolies  and  "  pollers 
of    the   people  "  :    "  They  are    a    nest    of   wasps — a 

legislation  and  the  laws  of  trade  will  leave  only  the  legitimate  enter- 
prises surviving." 

The  New  York  Times,  the  great  journal  which  has  been  first  and 
foremost  in  the  warfare  against  trusts,  makes  the  following  argument 
on  this  point : 

"Certain  trusts  are  maintaining  in  the  field  of  production  manu- 
facturers who  have  fallen  behind  in  the  race  for  lack  of  business 
ability  or  of  the  latest  improvement  in  machinery,  just  as  the  Copper 
Syndicate  enabled  the  owners  of  poor  mines  and  lean  ores  to  con- 
tinue production  when  natural  laws  and  free  competition  M-ould  have 
shut  them  out.  And  they  are  doing  this  by  exacting  an  artificial 
ring  price  for  their  products.  There  are  trusts  that  are  heavily 
loaded  with  old  factories  and  antiquated  machinery,  capitalized  at 
three  or  four  times  their  value,  and  that  are  trying  to  make  the  public 
support  this  rubbish  and  the  owners  of  it. 

"Such  schemes  retard  the  natural  elimination  of  unfit  machinery 
and  processes  that  would  take  place  if  the  action  of  natural  laws 
were  not  prevented.  Under  free  competition  old  machinery  gives 
place  to  new,'  and  old  processes  are  discarded  when  better  ones  are 
discovered  and  utilized.  The  lazy,  the  wasteful,  and  those  who  are 
otherwise  unfitted  for  the  struggle  yield  to  the  energetic,  the  thrifty, 
and  the  skilful.     Inventive  genius  is  stimulated  and  rewarded,  and 


TRUSTS.  231 

swarm  of  vermin  which  have  overcrcpt  the  hind. 
Like  the  frogs  of  Egypt,  they  have  gotten  possession 
of  our  dwelhngs,  and  we  have  scarce  a  room  free  from 
them.  They  sup  in  our  cup,  they  dip  in  our  dish, 
they  sit  by  our  fire.  We  find  tliem  in  the  dye  fat, 
washbowl,  and  powdering  tub.  They  share  with 
the  butler  in  his  box.  They  will  not  bate  us  a  pin. 
We  may  not  buy  our  clothes  without  their  brokage. 
These  are  the  leeches  that  have  sucked  the  com- 
monwealth so  hard  that  it  is  almost  hectical."  This 
was  the  same  Parliament  that  sent  Charles  the  First 
to  the  block.  One  of  the  chief  grievances  against 
him  was  his  creation  of  monopolies  in  wine,  coal, 
salt,   starch,   the   dressing  of  meats,  beavers,   belts, 

industries  show  steady  growtli  and  progress  as  tlie  old  is  cast  off  to 
give  place  to  the  new,  and  processes  are  improved. 

"  The  effect  of  trust  methods — the  suppression  of  competition  in 
prices  and  sales,  the  over-capitalization  of  idle  and  antiquated  fac- 
tories in  practical  consolidation  with  those  that  are  active  and  well 
equipped,  and  the  discouragement  by  intimidation,  or  otherwise  of 
new  and  independent  enterprises — is  frequently  to  retard  the  natural 
growth  and  improvement  of  an  industry,  in  order  that  rubbish  may 
be  made  valuable,  while  the  people  are  taxed  for  the  support  and  en- 
richment of  producers  who  are  incompetent  and  who  would  be  forced, 
under  tlie  working  of  competition,  to  show  new  proof  of  ability  and 
good  management  or  make  way  for  better  men.  It  is  true  that  the 
results  of  free  competition  are  not  always  satisfactory  to  all  the 
producers  concerned.  Some  will  suffer  loss,  and,  when  overproduc- 
tion has  been  caused  by  laws  that  interfere  with  the  natural  course  of 
trade,  the  readjustment  may  cause  serious  disturbance.  But,  while 
there  are  hardships  for  some  in  the  ceaseless  contest,  competition  is 
far  better  for  the  people  and  the  world  and  the  good  of  the  race 
than  al)Solute  or  qualified  monopoly  caused  by  a  suppression  of  it, 
and  whenever  the  question  has  come  before  our  courts  of  last  resort, 
this  doctrine  has  been  strongly  supported  in  the  interests  of  sound 
public  policy." 


232  THE   CORPORATION   PROBLEM. 

bone-lace,  leather,  pins,  and  other  necessaries,  and 
even  the  gathering  of  rags.  Prior  to  that  time  even 
Queen  Elizabeth  yielded  to  the  indignant  protest  of 
the  English  House  of  Commons  and  repealed  the 
monopolies  which  she  had  granted  on  iron,  coal,  oil, 
vinegar,  lead,  starch,  yarn,  leather,  and  glass. 

There  are  certain  natural  monopolies  which  have 
already  been  considered.  They  are  the  railroads, 
street  railways,  telegraph,  telephone,  gas,  electric 
lights,  and  others.  These  are  not  popular  or  de- 
sirable so  far  as  their  monopolistic  feature  is  con- 
cerned. But  the  hostility  against  them  is  mild  and 
trifling  compared  with  that  against  the  trusts,  the 
monopolies  in  the  necessaries  of  life,  in  sugar,  oil, 
coal,  and  the  articles  of  daily  consumption.  It  is 
asserted,  and  with  reason,  that  these  trust  monopolies 
press  hardest  on  the  great  masses  of  the  people, 
those  who  are  least  able  to  bear  the  exactions  ;  that 
they  are  a  burden  which  is  borne,  not  by  the  rich 
and  powerful,  but  by  the  poor  and  weak  ;  that  they 
are  monopolies  in  the  necessaries  of  life  of  the  farmer, 
the  mechanic,  and  the  laboring  man,  and  that  the 
exactions  fall  upon  those  who  work  for  their  daily 
sustenance.  A  monopoly  in  those  things  which  the 
plain  people  consume  day  by  day,  those  things 
which  they  eat  and  wear  and  use  in  their  daily  life, 
is  a  menace  to  the  future  of  the  nation  itself, 
inasmuch  as  it  affects  the  character  of  the  next 
generation. 

There  is  a  general  principle  of  business  ethics 
which  may  be  laid  down  without  much  fear  of  con- 
tradiction.    The  moment  an  individual,  partnership, 


TRUSTS.  233 

corporation,  or  combination  seeks  a  monopoly,  that 
moment  his  or  its  business  methods  become  iniqui- 
tous. Especially  is  this  the  case  where  the  sole 
object  of  a  combination  is  to  establish  a  monopoly. 
It  is  not  surprising,  therefore,  that  the  trust  has 
demoralized  business  ethics.  Its  chief  object  is  to 
put  up  prices  and  put  down  competition.  These 
objects  are  pursued  by  fair  means  and  foul.  Iniqui- 
tous bargains  are  forced  or  made  with  railroads. 
Legislatures  are  tampered  with.  Resort  is  had  to 
threats,  fear,  dishonesty,  bribery,  discriminations, 
and  even  crime.  Business  morals  are  corrupted. 
Dishonesty  ceases  to  be  odious.  Chicanery,  trickery, 
and  fraud  are  excused,  provided  the  desired  results 
are  attained.  The  great  wealth  and  splendid  talents 
of  the  trust  are  coupled  with  unscrupulous  methods 
and  a  greed  for  gain.  The  end  is  made  to  justify 
the  means.  Unscrupulous  devices  and  sinuous  ways 
are  overlooked  or  applauded  if  they  are  success- 
ful. The  history  of  the  trust  has  demonstrated 
that  when  a  body  of  men  seek  a  monopoly,  they 
begin  to  abandon  honorable  business  methods. 

Mr.  S.  C.  T.  Dodd,  the  solicitor  for  the  Standard 
Oil  Trust,  in  defending  that  organization  in  a  speech 
made  at  Boston,  January  8,  1889,  said  that  the 
Standard  Oil  Trust  had  used  capital  which  only 
a  large  combination  could  command,  in  opening 
markets  for  petroleum  throughout  the  civilized  and 
uncivilized  world  ;  that  it  had  decreased  the  price 
by  enlarging  the  output  and  making  large  gains  out 
of  small  profits  ;  that  it  had  further  decreased  the 
price  by  cheapening  the  methods  of  transportation, 


^34  THE   CORPORATION    PROBLEM. 

by  building  cars  for  carrying  oil  in  bulk,  and  by 
erecting  pipe  lines ;  that  all  the  persons  in  the  com- 
bination have  the  benefit  of  combined  knowledge 
and  experience,  and  the  best  and  cheapest  methods 
of  manufacture,  as  well  as  the  use  of  patents  ;  and 
that  in  consequence  thereof  the  actual  cost  of  manu- 
facturing refined  oil  has  been  reduced  66  per  cent, 
in  fourteen  years.  Mr.  Dodd  said  nothing  about 
the  business  practices  of  his  organization.  Judge 
Thomas  M.  Cooley,  however,  on  the  same  occasion 
said  : 

"A  few  things  can  be  said  of  trusts  without  danger  of  mistake. 
They  are  things  to  be  feared.  They  antagonize  a  leading  and  most 
valuable  principle  of  industrial  life  in  their  attempt  not  to  curb  com- 
petition merely,  but  to  put  an  end  to  it.  The  course  of  the  leading 
trust  of  the  country  has  been  such  as  to  emphasize  the  fear  of  them, 
and  the  benefits  that  have  come  froivi  its  cheapening  of  an  article  of 
commerce  are  insignificant  when  contrasted  with  the  mischiefs  that 
have  followed  the  exhibitions  in  many  forms  of  the  merciless  power 
of  concentrated  capital.  And  when  we  witness  the  utterly  heartless 
manner  in  which  trusts  sometimes  have  closed  manufactories  and 
turned  men  willing  to  be  industrious  into  the  streets  in  order  that  they 
may  increase  profits  already  reasonably  large,  we  cannot  help  asking 
ourselves  the  question  whether  the  trust  as  we  see  it  is  not  a  public 
enemy  ;  whether  it  is  not  teaching  the  laborer  dangerous  lessons  ; 
whether  it  is  not  helping  to  breed  anarchy." 

The  Conte7nporary  Revieiv  says  : 

"  No  future  treatise  on  political  economy  will  be  complete  without 
an  exposition  of  modern  trusts,  which  have  attained  such  alarming 
proportions  in  the  United  States  of  America.  The  growth  of  these 
combinations  is  one  of  the  most  remarkable  economic  developments 
of  the  time.  The  great  staples  of  the  country  are  fast  falling  into 
their  duties,  and  some  of  the  necessaries  of  life  are  already  under 
their  con#ol.  Trusts  are  illegal  corporations,  born  of  rapacity  and 
maintained  by  the  exercise  of  tyranny.     Their  organization  is  secret. 


TRUSTS.  235 

their  workinj^s  dark,  silent,  and  subtle.  They  stretch  out  their  tenta- 
cles— quietly  and  stealthily — until  whole  industries  are  in  their  grasp. 
They  are  contrivances  to  create  a  monopoly  by  throttling  all  competi- 
tors. They  squeeze  the  people  at  both  extremes  of  the  commercial 
scale — grinding  down  those  who  furnish  the  raw  niatcrial  ami  supply 
the  labor  to  the  lowest  limit,  and  exacting  the  highest  possible  price- 
from  the  consumer.  Once  established,  trusts  soon  become  strong — 
almost  impregnable — cita<lels  of  capital.  The  highest  business  capa- 
city is  employetl  in  organizing  and  maintaining  them.  They  laugh  at 
public  opinion,  ride  rough-shod  over  legislative  enactments,  and  baffle 
the  law  courts.  They  bridle  newspapers  with  subsidies,  and  send 
members  to  Congress,  They  have  their  agents  in  every  legislature 
and  bills  are  passed  in  their  interest.  They  tamper  with  judges,  they 
ally  themselves  with  political  leaders,  and  hire  professors  of  political 
economy  to  defend  them.  But  the  people  are  at  last  awakening  to 
the  dangers  of  trusts,  and  see  in  them  not  only  an  interference  with 
trade,  but  a  menace  to  political  liberty.  Tnists  stand  in  the  forefront 
of  the  protectionist  breastwQiks.  They  are  the  crux  of  the  tariff 
question.  It  is  round  them  flR«t  the  battle  rages  most  fiercely,  and 
tariff  reformers  are  bent  before  all  things  on  clearing  them  away." 

Professor  Bryce  .says  : 

"He  who  considers  the  irresponsible  nature  of  the  power  which 
three  or  four  men,  or  perhaps  one  man,  can  exercise  through  a  great 
corporation,  such  as  a  railroad  or  telegraph  company,  the  injury  they 
can  inflict  on  the  public,  as  well  as  on  their  competitors,  the  cynical 
audacity  with  which  they  have  often  used  their  wealth  to  seduce  offi- 
cials and  legislators  from  the  path  of  virtue,  will  find  nothing  unreason- 
able in  the  desire  of  the  American  masses  to  regulate  the  management 
of  corporations  and  narrow  the  range  of  their  action.  The  same 
remark  applies,  with  even  more  force,  to  combinations  of  men  not 
incorporated,  but  acting  together,  the  so-called  trusts — ;'.  «•. ,  commercial 
rings  or  syndicates."  ' 

THE  DANGERS  WHICH   ARE  BESETTING  THE  TRUSTS. 

The  country  has  just  passed  through  an  epoch  of 

trusts.      The    success    of    the    chief    combinations 

- - -£ 

'  Bryce's  "  American  Commonwealth,"  vol.  ii.,  ]>.  705. 


236  THE   CORPORATION   PROBLEM. 

dazzled  the  minds  and  set  on  fire  the  imagination 
of  men.  It  is  believed  that  trusts  have  existed  in 
over  thirty  of  the  necessaries  of  life.' 

And  the  list  is  growing  day  by  day. 

But  there  are  powerful  forces  at  work  which  are 
bringing  disaster  to  the  trust  mode  of  doing  business. 

Most  of  these  trusts  will  fall  to  pieces  of  their  own 
inherent  weakness.  The  tie  which  binds  together 
the  members,  who  formerly  were  competitors,  is  not 
strong  enough  to  endure.  Trusts  which  consist  of 
mere  agreements  to  keep  up  prices  are  destined 
sooner  or  later  to  go  to  pieces.  Unless  there  is  a 
union  of  property  as  well  as  an  agreement  to  act 
together,  the  agreement  will  be  broken.  Witness 
the  former  pools  of  railroads,  often  made  and 
always  broken.  Unity  and  single  ownership  of  all 
the  property  of  all  the  competing  concerns  is  the 
only  assurance  of  long  life  to  a  trust.  Hence  it  is 
that  most  of  the  trusts  now  existing,  being  merely 
contract  agreements  to  act  together,  will  be  broken 
up  by  the  acts  of  the  members  themselves,  who  will 
secretly  or  openly  violate  their  contract. 

There  is  another  rock  upon  which  many  trusts  will 

'  The  Shipping  List  prints  the  following  list  of  trusts  in  existence  in 
the  United  States  : 

Match  Trust,  Steel-Rail  Trust,  Jute-Bag  Trust,  Cordage  Trust, 
Kerosene  (Standard)  Oil  Trust,  Borax  Trust,  Cotton-Seed  Oil  Trust, 
Linseed-Oil  Trust,  Paper-Envelope  Trust,  Nail  Trust,  Barbed-Fence 
Trust,  Lead  Trust,  Nickel  Trust,  Sugar  Trust,  School  Book  Trust, 
Gutta-Percha  Trust,  Copper  Trust,  Zinc  Trust,  Slate-Pencil  Trust, 
Iron  Nut  and  Washer  Trust,  Oil-Cloth  Trust,  Ultramarine  Trust, 
Whisky  Trust,  Gas  Trust,  Dressed-Beef  Trust,  Distillers'  and  Cattle 
Feeders'  Trust,   Starch  Trust,   Cigarette  Trust,   Straw  Braid  Trust. 


TRUSTS.  237 

go  to  pieces.  It  is  the  discovery  that  the  strong 
concerns  make  a  fatal  mistake  in  uniting  with 
the  weak  concerns.  The  trust  is  the  salvation  of 
the  weak  competitor.  It  enables  him  to  become 
established  ;  to  build  up  business  and  reputation  ; 
to  weather  the  first  financial  storms  ;  and  to  avoid 
that  certain  bankruptcy  which  awaits  him,  if  the 
war  of  competition  goes  on.  A  few  years  of  the 
trust  puts  him  fairly  on  his  feet.  He  then  is  able  to 
stand  alone.  He  is  ready  to  meet  the  break  up  of 
the  trust,  and  the  war  of  competition.  Meanwhile 
the  strong  concerns  have  gained  little.  They  have 
received  greater  profits,  but  have  caused  weak  com- 
petitors to  become  strong  competitors.  The  inevit- 
able war  of  prices  and  competition  has  been  delayed 
for  a  few  years,  but  the  delay  has  raised  up  new 
powers  against  the  old  and  well  established  concerns. 
When,  finally,  the  trust  goes  to  pieces,  and  competi- 
tion again  decrees  that  only  the  fittest  shall  survive,  a 
long  and  disastrous  struggle  will  occur.  Out  of  this 
struggle  a  few  great  establishments  will  arise  on  the 
ruins  of  the  many  competing  concerns.  But  the 
trust  will  have  proved  a  delusion  and  a  snare.  Such 
has  been  the  history  of  the  railroad  pool,  and  such 
will  be  the  histor)'  of  the  majority  of  the  trusts. 

There  is  another  pitfall  for  the  trust.  It  is  the 
certainty  of  new  competitors.  Competing  concerns, 
content  with  reasonable  prices,  will  supply  the 
market.  Even  after  a  trust  becomes  an  absolute 
monopoly  it  is  never  safe.  Its  vast  profits  are  a 
tempting  prize,  to  be  contended  for  by  the  wealth 
and    enterprise   of  all  men.     Capital,  ever  ready  to 


238  THE    CORPORATION    PROBLEM. 

make  daring  ventures  in  the  hope  of  great  returns, 
is  a  power  that  cannot  be  suppressed  by  the  trust. 
It  will  be  unceasing  in  its  menace  and  it  cannot  be 
subdued. 

One  of  the  leading  journals  of  London,  speaking 
of  American  trusts,  said,  in  May,  1890: 

"A  more  powerful  remedy  than  that  of  any  penal  code,  however, 
exists  in  the  practical  impossibility  of  cornering  being  carried  on  to 
any  serious  lengths  without  great  peril  to  those  who  resort  to  it.  It 
is  difficult  to  conceive  of  any  body  of  capitalists  being  sufficiently 
powerful  to  monopolize  an  article  in  general  demand,  and  to  use  their 
monopoly  for  any  length  of  time  to  the  serious  hurt  of  the  public. 
Directly  prices  became  prohibitive  there  would  be  a  formidable 
movement  in  the  opposite  direction,  and  the  monopoly  would  break 
down.  Only  in  remotely  possible  cases  could  a  corner  enjoy  a  pro- 
longed triumph  over  the  needs  of  the  public.  .  .  .  Natural  laws, 
after  all,  are  more  potent  factors  than  all  the  contrivances  of  selfish 
and  unscrupulous  men." 

A  world-wide  trust — a  trust  embracing  all  lands 
and  all  peoples,  is  yet  to  be  seen.  It  was  attempted 
in  the  French  copper  trust,  but  that  gigantic  concern 
went  down  and  brought  ruin  upon  its  members.  Its 
recent  collapse,  even  after  it  had  been  operated  with 
almost  unlimited  capital,  temporary  success,  and 
great  ability,  shows  that  the  markets  of  the  whole 
world  are  too  great  and  competitors  too  numerous 
to  be  collected  or  controlled  by  a  single  trust.* 

'  At  the  time  the  F'rench  copper  trust  was  in  the  height  of  its 
power  the  French  government  proposed  to  attack  it  through  the 
French  law  against  combinations.  The  immense  profits,  however, 
coming'into  France  through  the  operation  of  the  trust  caused  the  gov- 
ernment to  stay  its  hand.  But  when  the  trust  collapsed  a  different 
view  was  taken  of  the  situation,  and  M.  Secretan,  the  most  promi- 
nent man  in  the  trust,  was  sentenced  to  six  months' imprisonment  and 


TRUSTS.  230 

The  two  great  things  which  a  trust  fears  arc  : 
(i)  the  decisions  of  the  courts  forfeiting  the  cliar- 
ters  of  the  constituent  corporations  ;  (2)  new  com- 
petitors on  a  large  scale,  either  at  home  or  abroad. 
Whether  it  is  best  by  free  trade  to  sacrifice  various 
branches  of  American  manufacturing,  in  order  to 
destroy  the  trusts,  is  a  question  not  yet  con- 
clusively decided.     The  people   differ  in  opinion   as 

a  fine  of  3,000  francs,  as  n  punishment  practically  for  his  failure  to 
make  the  trust  a  success. 

Judge  Thompson,  of  St.  Louis,  thus  describes  the  copper  trust  : 
"  It  was  my  fortune  to  have  for  a  ship  companion  on  a  trans- 
atlantic voyage  a  member  of  that  so-called  trust,  and  he  was  good 
enough  to  explain  to  me  how  it  was  organized  and  what  had  been 
its  results.  The  scheme  consiste<l  in  nothing  less  than  forestall- 
ing or  '  cornering,'  to  use  a  modern  expression,  the  market  of  the 
whole  world  in  copper  for  the  period  of  three  years.  This  it  at- 
tempted to  accomplish,  and  did  for  a  time  accomplish,  by  buying  up 
the  out-put  of  all  the  copper  mines  in  the  world  for  that  period, 
imder  contracts  by  which  they  agreed  to  pay  the  mine  owners  thirteen 
cents  per  pound,  and  one-half  of  whatever  the  so-called  '  syndicate  ' 
should  be  able  to  get  for  the  copper  in  excess  of  thirteen  cents  per 
pound.  The  immediate  effect  of  this  gigantic  crime  against  com- 
merce was  to  advance  the  price  of  copper  in  the  United  States  from 
nine  to  sixteen  cents  a  pound  ;  so  that,  where  the  mine-owners  were 
realizing,  before  the  formation  of  the  trust,  nine  cents  per  pound, 
they  soon  after  found  themselves  realizing  fourteen  and  one-half  cents 
per  pound.  But  the  syndicate  did  not  take  the  precaution  to  buy  up 
all  the  old  scrap  copper  in  the  world,  nor  to  buy  all  the  metal  that 
could  be  substituted  in  the  arts  in  the  place  of  copper,  nor  to  arrange 
with  those  who  were  consuming  copper  that  they  should  continue  to 
consume  it  in  the  same  quantities,  notwithstanding  any  increase  of 
price  which  the  syndicate  might  demand.  The  result  was  that  the 
gigantic  scheme  collapsed,  dragging  down  with  it  one  of  the  great 
banking  institutions  of  France,  bankrupting  an  untold  number  of 
individuals,  and,  what  was  of  less  consequence,  driving  to  suicide 
the   'Napoleon  of  Finance'  who  had  organized  the  crime." 


240  THE    CORPORATION   PROBLEM. 

to  the  merits  of  a  protective  tariff  and  free  trade. 
But  there  is  no  inclination  to  protect  the  trusts. 
If  it  is  finally  concluded  that  the  protective  tariff 
laws  create  and  foster  the  trusts,  then  the  protective 
tariff  laws  will  be  repealed. 

Hon.  John  Sherman,  in  a  speech  delivered  in  the 
United  States  Senate  on  September  29,  1890,  said, 
concerning  the  recently  enacted  protective  tariff 
act  : 

' '  The  great  obstacle  and  menace  that  stands  in  the  way  of  the  suc- 
cess of  this  tariff  bill,  that  which  more  than  all  else  will  determine 
the  length  of  its  life,  that  which  will  test  its  wisdom  hereafter,  is  the 
question  which  has  been  discussed  heretofore  in  the  Senate,  whether 
the  manufacturers  of  this  country  are  willing  to  maintain  free  and 
fair  competition  in  their  various  productions,  so  that  the  people  may 
have  the  benefit  of  that  which  they  claim  as  their  right — free  and  full 
competition  in  domestic  markets  of  domestic  products.  |  The  great 
danger  of  this  tariff  and  of  all  schemes  for  building  up  domestic 
industries  by  law  is  that  the  beneficiaries  themselves,  capitalists  and 
laborers  alike,  will  not  be  content  to  realize  the  advantages  they 
enjoy,  but  will  combine  and  confederate  in  order  to  cheat  the  peo- 
ple of  that  which  they  have  the  right  to  enjoy.  ,  .  .  This  pro- 
tective policy  must  not  degenerate  into  monopoly — into  trusts  or 
combinations  to  raise  prices  against  the  spirit  of  the  common  law. 
...  If  .  .  .  the  notion  prevails  that  it  is  right  and  just  for  peo- 
ple who  engage  in  the  same  pursuit  to  pool  their  issues,  to  appoint  a 
trustee  to  manage  their  affairs,  to  deprive  themselves  of  the  powers 
which  they  enjoy  as  citizens  and  as  corporations  in  order  to  make 
corners  and  by  various  devices  to  cheat  the  people,  then  the  protective 
tariff  system  will  disappear  as  rapidly  as  it  has  sprung  into  ex- 
istence." ' 

'  Judge  Thompson,  of  St.  Louis,  recommends  the  following  treat- 
ment of  the  trusts  : 

"  My  idea  is  that,  as  a  general  rule,  men  should  be  free  to  combine 
for  their  own  interest  and  profit  ;  that  both  the  trust  and  the  trades 
union  should  be  let  alone  ;  but  that,  if  the  evils  produced  by  these 


TRUSTS.  241 

But  the  laws  of  competition  and  chany;es  in  the 
protective-tariff  system  proceed  slowly.  The  trust 
has  the  power  to  delay  all  these.  Its  wealth  mounts 
into  the  hundreds  of  millions  of  dollars.  It  em- 
ploys tens  of  thousands  of  men.  It  has  destroyed 
hundreds  of  competitors.  It  ignores  the  press,  the 
legislature,  and  the  law.  Its  powers  are  not  limited 
by  charter  or  public  opinion.  Its  policy  is  directed 
by  the  highest  order  of  executive  and  legal  talents. 
Its  movements  are  secret,  silent,  unerring,  and  all 
powerful,  and  it  extends  into  all  branches  of  indus- 
tr}\     It  has  no  fear  of  Congress  or  State  legislatures. 

The  courts,  however,  are  doing  more  than  all  else 
to    drive    out    the    trusts.     They  are    forfeiting  the 

rombinations  become  unbearable,  tjovernnient  should  proceed  with 
rigid  impartiality  against  both. 

*'  I,  As  a  general  rule,  we  may  safely  tru^t  to  the  operation  of 
natural  laws  and  to  the  inherent  weakness  of  every  human  combina- 
tion for  a  sufficient  remedy, 

"  2.  But  if  this  remedy  proves  inadequate  in  any  case — if  men,  by 
combining,  acquire  in  business  struggles  undue  advantage  over  those 
who  do  not  combine,  the  remedy  is  first  to  be  sought  outside  of  the 
law — outside  of  government — Viy  individual  action,  by  counter  move- 
ments of  some  kind.  If  capital  combines  against  labor,  labor  must 
combine  against  capital.  If  manufactures  combine  against  agricul- 
ture, agriculture  must  combine  against  manufactures.  If  the  common 
carrier  combines  against  the  farmer,  the  manufacturer,  the  merchant, 
and  the  laborer,  then  all  must  combine  against  the  common  carrier. 
Meet  combination  with  combination  ;  strike  with  strike  ;  lockout 
with  lockout  ;  fight  the  devil  with  fire. 

"  3.  Withdraw  all  governmental  aid,  in  the  form  of  protective 
tariffs  or  otheru-ise,  from  combinations  which  threaten  to  suppress 
competition  in  any  trade,  or  to  engross  the  market  in  any  commodity. 
Apply  this  principle  impartially  against  combinations  of  capital  and 
against  fomhinations  of  labor  ;  repealing  on  the  one  hand  tariff  \a^^^%. 
not  needful  f<3r  revenue,  and,  on  the  Other  hand,  laws  which  hamper 
If 


242  THE    CORPORATION    PROBLEM. 

charters  of  the  constituent  corporations  which  make 
up  the  trust,  and  are  appointing  receivers  of  the 
property.  The  decisions  in  Louisiana,  Illinois,  and 
New  York  have  settled  the  law  beyond  controversy. 
The  trusts  have  at  length  realized  that  they  are 
Illegal  and  must  go.  And  the  question  with  them 
now  is,  What  shall  they  do  next  ? 

TRANSFORMATION,      REORGANIZATION,    AND      DISAPPEAR- 
ANCE    OF     TRUSTS    INTO     LARGE     CORPORATIONS. 

The  first  great  trust  in  this  country  was  the 
Standard  Oil  Trust.  The  first  great  combination  of 
manufacturers  into  a  monopoly,  however,  was  the 
Diam.ond   Match    Company.     The  purpose  was  the 

the  importation  of  foreign  labor,  not  needful  for  the  exclusion  of 
undesirable  immigrants. 

' '  4.  Withdraw  corporate  franchises  from  every  corporation  which 
attemjDts  to  suppress  competition  and  engross  the  market  in  any  com- 
modity, and  leave  every  adventurer  in  such  an  enterprise  liable  as  a 
partner.  No  matter  how  small  his  holdings  in  it  may  be,  let  it  be 
known  that  he  involves  his  whole  fortune  in  the  crime  against  society 
which  he  and  his  confederates  attempt,  and  that  if  their  attempt  goes 
down,  he  goes  down. 

"5.  If  these  means  fail,  level  against  the  individuals — not  against 
the  corporations — the  machinery  of  the  criminal  law." 

Charles  Francis  Adams,  writing  in  March,  1 891,  said  concerning 
trusts  :  "So  far  as  my  judgment,  observation,  and  study  go,  I 
have  found  that  business  combinations  and  trusts  are  mainly  dangerous 
to  those  who  are,  so  to  speak,  inside  them.  If  left  absolutely  alone 
by  the  government,  they  will  work  nothing  but  good  ;  unless  they  are 
perverted  to  some  purpose  opposed  to  the  laws  of  trade,  in  which 
case  they  inevitably,  soon  or  late,  bring  about  the  ruin  of  those  con- 
cerned in  them.  I  think  there  is  no  exception  to  this  rule.  Every 
trust,  so  called,  exists  even,  on  condition  that  it  supplies  that  which 
it  controls  cheaper  than  any  one  els.e-  can  afford  to  supply  it." 


TRUSTS.  243 

same — the  creation  of  a  monopoly.  The  mode  of 
organization  was  different,  tlie  former  being  a  genu- 
ine trust — that  is,  the  placing'  of  all  the  shares  of 
stock  of  many  corporations  in  the  hands  of  trustees 
who  issue  certificates  therefor;  while  the  Diamond 
Match  Company's  mode  of  organizing  the  monopoly 
was  to  organize  one  single  huge  corporation  and 
have  it  purchase  and  own  all  the  competing  manu- 
factories, payment  therefor  being  made  chiefly  in 
shares  of  stock. 

The  law  has  decided  that  the  trust  mode  of  organ- 
izing a  monopoly  is  illegal.  Hence  it  is  that  the 
numberless  trusts  are  hastening  to  adopt  the  other 
mode  of  organization — the  corporation,  the  plan  of 
the  Diamond  Match  monopoly.  Already  the  Sugar 
Trust  and  the  American  Cotton  Oil  Trust  have  dis- 
solved and  become  New  Jersey  corporations,  and 
other  trusts  are  following  the  example.' 

What  is  to  be  said  about  these  great  corporations  ? 

One  thing  may  readily  be  conceded.  It  is  better 
to  have  the  large  corporation  than  to  have  the  trust. 
There  is  something  inherently  vicious  and  dangerous 
in  the  powers  which  are  given  to  the  trustees  of  a 
trust.  The  secrecy  of  their  operations  and  orders, 
the  concealment   of  the  condition    of  the  business, 

'  The  Linseed-Oil  Trust  is  now  incoq^orated  in  Illinois  with  a 
capital  of  $iS, 000,000.  It  owns  fifty-two  works.  The  Distilling 
and  Cattle-Feeding  Trust  is  also  now  incorporated  in  Illinois  with  a 
capital  of  ^35,000,000.  It  owns  seventy-two  works.  Tlie  American 
Tobacco  Trust  is  now  incorporated  in  New  Jersey  with  a  capital  of 
f25,<X)0,ooo.  It  owns  five  works.  The  American  Straw-Board 
Trust  was  incorporated  in  Illinois  in  1888.  It  owns  twenty-ona 
factories,  of  which  eighteen  are  running. 


244  'THE    CORPORATION    PROBLEM. 

the  power  to  refuse  all  information,  and  the  unre- 
stricted irresponsible  powers  of  the  trustees  ren- 
ders the  trust  mode  of  doing  business  intolerant 
and  intolerable. 

These  particular  evils  do  not  exist  to  such  an  ex- 
tent in  a  corporation.  The  safeguards,  checks,  and 
regulations  which  have  been  thrown  around  corpora- 
tions for  the  protection  of  stockholders  and  credit- 
ors are  many  and  valuable.  They  limit  the  powers 
of  the  directors  ;  provide  for  statements  of  the  busi- 
ness ;  allow  stockholders  to  investigate  and  examine 
the  books,  and  enable  the  public  as  well  as  stock- 
holders and  creditors  to  know  something  of  what  is 
going  on. 

But  is  the  public  satisfied  with  this  new  method  of 
combining  competing  concerns,  of  organizing  a  mo- 
nopoly— the  method  adopted  by  the  Diamond  Match 
Company,  the  method  of  uniting  in  one  great  cor- 
poration, the  method  that  is  now  being  adopted  by 
all  the  trusts  ? 

It  will  be  difificult  to  annul  the  charters,  because 
the  charters  may  be  obtained  in  a  State  which  will 
not  interfere  with  the  trusts.  It  will  be  dif^ficult  to 
legislate  against  them  because,  although  a  State 
may  legally  exclude  a  foreign  corporation  from  do- 
ing business  within  its  boundaries,  yet  it  is  extremely 
difificult  to  enact  laws  which  accomplish  that  result. 

Nevertheless  the  courts  are  refusing  to  enforce  the 
contracts  of  such  corporations  and  are  annulling  their 
charters.  In  Michigan,  where  several  persons  turned 
over  their  match  factory  to  the  Diamond  Match 
Company,  a   corporation    formed    to    obtain   a    mo- 


TRUSTS.  245 

nopoly,  and  these  parties  contracted  to  divide  their 
profits  in  a  certain  proportion,  the  Supreme  Court 
of  the  State  refused  to  enforce  that  contract,  and 
refused  because  the  purpose  of  it  was  to  aid  in  cre- 
ating the  match  monopoly.  In  Ilh'nois  the  charter 
of  a  corporation  formed  to  own  and  control  the 
shares  of  stock  of  competing  gas  companies  was 
annulled  by  the  State,  the  court  holding  that  the 
charter  was  invalid.  Judging  from  these  cases,  the 
prospects  of  this  latest  form  of  trust  are  not  flattering 
or  reassuring. 

The  first  campaign  of  the  warfare  with  the  trusts 
has  been  fought  out.  The  victory  has  been  with  the 
people.  The  trusts  have  been  routed  and  driven 
to  a  second  line  of  defence.  They  are  entrenching 
themselves  under  the  cover  of  corporate  charters. 
Whether  they  shall  be  driven  from  these  remains  to 
be  seen.  Certain  it  is  that  unless  they  justify  their 
existence  they  will  be  annihilated  by  the  courts, 
legislatures,  and  new  competitors. 


CHAPTER  VI. 

CORPORATIONS   AND    THE    REPUBLIC. 

There  are  numberless  instances  in  which  corpora- 
tions have  corrupted  the  government.  They  have 
controlled  nominating  conventions;  carried  elections; 
dictated  appointments  ;  tampered  with  aldermen  and 
municipal  authorities  ;  bribed  legislators,  judges,  and 
other  public  officers,  and  made  their  influence  felt  in 
Congress  and  every  branch  of  the  national  govern- 
ment. These  are  facts  known  to  all.  And  it  will  serve 
no  useful  purpose  to  pass  in  review  the  details  of 
the  notorious  record.  The  evil  has  existed  and  still 
exists.  It  cannot  be  abolished  by  denunciation  nor 
by  statute.  There  is  a  cause  for  its  existence,  and  it 
will  not  pass  away  until  the  cause  is  removed. 

Among  the  problems  before  the  American  people 
there  are  none  more  important  than  these  :  Why  is 
it  that  corporations  seek  to  control  government ; 
how  is  their  corruption  to  be  stopped  ;  what  are  the 
real  dangers,  if  any,  which  the  corporations  have 
brought  upon  government  ;  and  how  are  those  dan- 
gers to  be  met  ?  For  many  years  to  come  America 
will  be  interested  in  these  questions. 

It  is  not  remarkable  that  corporations  seek  to  con- 
trol government.     The  reason  why  they  take  part  in 

246 


CORPORATIONS   AND   THE    REPUBLIC.  247 

politics  ;  manipulate  caucuses  and  conventions ;  use 
money,  power,  and  votes  in  elections  ;  bribe  and  in- 
fluence national,  State,  and  municipal  officers,  judges, 
and  legislators ;  and  often  control  States  and  cities, 
is  plain.  Corporations  do  all  tliis  to  protect  and 
increase  their  propert}-.  Politics  and  bribery  are  to 
them  a  matter  of  business.  They  are  not  seeking 
glory,  or  honor,  or  even  power  for  the  sake  of 
power.  They  are  seeking  property.  Usually  the 
ambition  of  those  who  enter  politics  is  not  merce- 
nar}-  ;  it  is  to  acquire  reputation,  or  wield  power, 
represent  large  bodies  of  men,  or  gratify  an  innate 
fondness  for  leadership — all  for  the  mere  pleasure  of 
so  doing,  and  all  leading  to  money  losses  rather  than 
to  money  gains.  But  these  are  not  the  motives 
which  actuate  corporations.  They  are  in  politics 
for  business  only.  As  already  stated,  they  are  there 
to  protect  and  increase  their  property.  And  if  gov- 
ernment could  afford  to  ha\'e  nothing  to  do  with 
their  property,  they  would  have  nothing  to  do  with 
government. 

Already  in  the  prior  pages  of  this  book  the  various 
controversies  between  the  corporations  and  the  gov- 
ernment have  been  pointed  out.  Government  is 
seeking  to  rule  the  corporations,  and  the  corporations 
are  seeking  to  control  the  government.  Indeed,  it 
seems  as  though  every  Important  property  interest  of 
a  corporation  involves  it  in  a  contest  with  the  legisla- 
tive, executive,  or  judicial  part  of  the  national,  State, 
or  municipal  government.  What  wonder  is  it  then 
that  corporations  are  constantly  interfering  with 
government  ?     Is  it  anything  strange  or  inexplicable 


248  THE    CORPORATION    PROBLEM. 

that  they  should  do  so  ?  They  have  vast  property 
Interests  at  stake.  Naturally  they  are  more  active 
and  aggressive  than  men  who  take  part  in  govern- 
ment from  motives  which  are  merely  partisan  or 
theoretical.  So  long  as  the  business  of  corporations 
Is  affected  by  government,  just  so  long  will  corpora- 
tions continue  to  bribe,  brow-beat,  and  dominate 
public  officials. 

This  source  of  political  corruption,  however,  will 
decrease  as  time  goes  on.  The  points  of  controversy 
between  the  corporations  and  government  will  grow 
less  and  less.  And  as  these  disputes  diminish  In 
number  and  intensity,  so  also  will  diminish  the 
motives  and  reasons  of  the  corporations  for  inter- 
fering with  government.  Thus,  when  the  various 
States  prohibited  the  granting  of  special  charters  to 
corporations,  the  corporations  at  once  withdrew  very 
largely  from  the  legislatures.  And,  hereafter,  when 
the  consolidation  of  the  railroads  Into  a  few  great 
systems  has  taken  place,  the  contest  between  the 
railroads  and  the  government  over  secret  discrimina- 
tions, rebates,  free  passes,  and  a  w^hole  cohort  of  evils 
will  cease.  The  consolidated  roads,  being  without 
competition,  will  have  no  occasion  to  resort  to  these 
particular  abuses.  The  existing  controversies  be- 
tween the  corporations  and  the  government  are  many 
In  number,  and  seem  to  be  increasing  rather  than 
decreasing.  Questions  which  formerly  were  between 
the  corporations  and  Individuals  are  now  between 
the  corporations  and  the  government,  the  latter 
having  taken  u[  the  unequal  fight  which  was 
formerly  carried  on  by  individuals.     But  these  con- 


CORPORATIONS    AND    TIIH    REPUBLIC.  249 

troversies  will  gradually  be  adjusted  by  statutes, 
decisions,  consolidations,  and  mutual  concessions. 
And  when  so  adjusted,  then  the  present  corruption 
of  government  by  corporations  for  the  purpose  of 
protecting  and  increasini^  corporate  ])r()perty  will 
come  to  an  end. 

But  there  is  another  phase  to  this  problem  of  the 
corporations  and  the  republic.  The  republic  has  an 
old  antl  never-ending  danger — plutocracy, — a  danger 
that  is  common  to  all  advanced  forms  of  government. 
Plutocracy  always  has  and  always  will  seek  to  con- 
trol government.  Government  gives  to  it  worldly 
honors,  social  position,  fame,  power  in  the  affairs  of 
men,  and  greater  opportunities  to  amass  wealth. 
Plutocracy  undermines  a  republic  by  undermining 
the  character  of  its  citizens.  It  makes  money  and 
pleasure  the  objects  of  existence  and  the  tests  of 
success.  Whatsoever  is  an  aid  to  plutocracy  is  a 
danger  to  the  republic. 

The  corporation  is  the  ally,  the  agent,  the  repre- 
sentative of  plutocracy.  To  a  small  extent  corpora- 
tion bonds  and  stocks  are  owned  by  the  many.  But 
the  control,  the  management,  and  the  ownership  of 
the  great  corporations  of  the  land  are  to-day  in  the 
hands  of  the  wealthy  few.  Plutocracy  has  appeared 
in  a  new^  guise,  a  new  coat  of  mail — the  corporation. 
The  struggle  of  democracy  against  plutocracy — a 
struggle  that  is  coming  to  the  American  people — 
will  be  between  democracy  and  the  corporation. 
The  people  are  beginning  to  recognize  their  old 
plutocratic  foe  in  its  new  corporate  form. 

And  the  corporation  is  no  mean  ally.      It  gives  to 


250       THE  CORPORATION  PROBLEM. 

plutocracy  a  power  which  it  never  before  possessed. 
Private  fortunes  in  corporate  form,  and  by  legal 
sanction,  have  rapidly  and  enormously  increased, 
until  now  the  American  Republic  has  to  deal  with 
aggregations  of  capital,  such  as  the  world  has  never 
before  beheld.  There  has  resulted  a  concentration 
of  wealth  that  past  ages  never  dreamed  of,  and 
private  fortunes  exist  which  surpass  those  of  Baby- 
lon and  Rome.  The  corporations  have  made  the 
plutocrat  more  wealthy  and  more  powerful  than 
ever  before. 

Nor  is  the  corporation  tempered  by  any  of  the 
amiable  weaknesses  of  plutocracy.  There  is  a  great 
difference  between  wealth  as  used  by  the  owner 
himself  and  wealth  as  used  by  the  corporation. 
When  the  capitalist  invests  and  administers  his 
wealth  himself,  his  humanity  asserts  itself ;  his  sym- 
pathy, generosity,  gratitude,  sense  of  wrong,  sensi- 
tiveness to  public  criticism,  and  aversion  to  public 
dislike — all  tend  to  prevent  harshness  and  injustice 
in  the  use  of  his  power.  But  with  the  advent  of 
the  corporations,  these  restraints  are  passing  away. 
Fifty  years  ago  wealthy  men  were  identified  with 
their  investments.  To-day,  with  a  few  exceptions, 
the  great  enterprises  are  not  connected  in  the  public 
mind  with  individual  names.  Corporations  have 
separated  the  investor  from  the  investment.  The 
millionaire  uses  the  corporation  to  invest  his  prop- 
erty. He  owns  the  stocks  and  bonds  ;  controls 
the  corporation,  and  makes  it  do  his  bidding.  But 
all  acts  in  the  management  of  the  property  are 
done  not  in  his  name  but  in  the  name  of  the  cor- 


CORPORATION>    AND    THK    KEPrRI.IC.  2$  I 

poration.  If  corrupt  and  unscrupulous,  the  odium 
and  disgrace  rest  upon  the  corporation  and  not  upon 
the  individual.  Take  it  all  in  all,  the  corporation  is 
as  perfect  and  heartless  a  money-making  machine  as 
the  wit  of  man  has  ever  devised. 

The  corporation  iS  dangerous  to  the  republic.  It 
has  become  the  tool  of  plutocracy.  It  has  increased 
the  historical  dangers  to  government  from  the  con- 
centrated wealth  of  the  few.  It  has  been  instru- 
mental in  increasing  that  concentration  of  wealth 
and  in  shielding  its  owners  from  risks  and  opprobrium 
arising  from  its  illegal  use.  It  is  without  moral 
responsibility  or  feeling.  It  can  do  more  harm  than 
individuals,  and,  in  so  far  as  plutocracy  is  a  danger 
to  the  republic,  the  corporation  has  increased  that 
danger. 

And  yet  the  corporation,  as  an  ally  of  the  pluto- 
crat, is  fickle,  unreliable,  and  vulnerable. 

The  plutocrat  cannot  always  be  sure  of  his  cor- 
poration. It  rarely  represents  one  capitalist  alone. 
It  is  controlled  by  several  acting  in  union.  The 
wealth  of  each,  so  far  as  it  is  invested  in  that 
corporation,  cannot  be  used  for  his  personal  pur- 
poses. It  must  be  used  to  further  the  corporate 
ends — the  making  of  money.  It  cannot  long  be 
used  to  further  the  political  aspirations  of  one  of  its 
members,  however  great  a  plutocrat  he  may  be. 
The  others  will  not  allow  it.  He  is  deprived  of 
control. 

The  corporation  is  withdrawing  the  plutocrat  from 
the  field  of  politics.  It  is  engrossing  him  in  business. 
The  colossal  schemes  of  the  age  are  more  attractive 


252  THE    CORPORATION    PROBLEM. 

than  the  position  even  of  a  United  States  senator. 
A  railroad  president  is  a  man  more  courted,  has 
more  power,  enjoys  more  excitement,  and  has  greater 
opportunities  for  the  display  of  ability,  energy,  and 
ambition  than  the  governor  of  a  State.  Corpora- 
tions are  absorbing  the  wealthy  as  well  as  the 
wealth  of  the  nation.  They  are  furnishing  an  out- 
let for  the  ambition  as  well  as  the  ostentation  of  the 
plutocrat.  Moreover,  to  the  extent  that  they  absorb 
the  wealth  of  the  wealthy,  to  that  extent  the  pluto- 
crat does  not  use  his  money  in  extravagance,  waste, 
the  demoralization  of  the  people,  and  the  corruption 
of  government.  The  Roman  plutocrat  bought  an 
empire  ;  Vanderbilt  buys  systems  of  railroads. 

But  the  most  important  fact  of  all  remains  to  be 
mentioned.  The  corporation  holds  its  life  subject 
to  the  will  of  the  people.  It  is  a  creature  and 
creation  of  the  state.  Its  powers  may  be  changed, 
its  duties  increased,  its  charter  may  be  repealed 
and  its  existence  ended.  It  is  sensitive  to  the  very 
breath  of  public  opinion.  It  is  vulnerable.  Plu- 
tocracy in  the  form  of  the  individual  is  largely 
beyond  the  reach  of  legislatures  and  the  law.  But 
plutocracy  in  the  form  of  the  corporation  is  open 
to  attack.  It  can  be  regulated,  restricted,  and 
annihilated. 

Plutocracy  acting  through  corporations  is  obliged 
to  be  cautious  and  conservative.  The  vast  interests 
which  they  represent,  the  wealth  which  they  manage, 
and  the  size  to  which  they  have  grown,  render  it 
dangerous  for  them  to  incur  the  hostility  of  the 
people.     The    plutocrat    gives    bonds    to    keep    the 


CORPORATIONS    AND    THE    REPUBLIC  353 

peace  when  he  acts  through  the  corporation.  It  is 
by  reason  of  this  that  the  great  corporations  of  the 
land  are  gradually  passing  into  the  hands  of  conserva- 
tive men — men  who  realize  the  risks  and  responsi- 
bilities of  these  creatures  of  the  state. 

Notwithstanding  all  this,  the  great  majority  of  the 
American  people  look  upon  corporations  and  their 
colossal  aggregations  of  capital  as  dangerous  to  the 
republic.  A  vague  and  indescribable  dread  and 
suspicion  of  them  pervade  the  minds  of  men.  There 
is  reason  for  this  distrust.  And  yet  it  is  to  be  borne 
in  mind  that  the  history  of  the  republic  gives  no 
occasion  for  gloomy  forebodings  of  ill.  Whenever  a 
national  crisis  has  occurred,  whenever  a  political 
regeneration  has  become  necessary,  whenever  the 
national  existence  has  been  imperilled,  whenever 
corruption  has  become  dangerous,  whenever  the 
leaders  have  been  in  despair  and  have  run  hither  and 
thither  in  doubt  and  confusion,  the  great  masses 
of  the   people  have  been  equal  to  the   emergency. 

And  so  it  will  be  in  regard  to  the  corporations. 
They  will  continue  to  vex  the  minds  of  men  and 
to  appear  as  ominous  spectres  and  omens  of  ill.  But 
the  American  people,  clear  in  their  intellectual 
powers,  honest  in  their  purposes,  and  decisive  in 
their  acts,  have  no  need  to  fear  them.  "  The  Cor- 
ooration  Problem  "  will  be  solved,  and  the  solution, 
when  it  comes,  will  be  satisfactory',  thorough,  and 
complete. 


INDEX. 


AcwoRTH,  on  short  aiul  long  haul, 
41  ;  on  American  railroads,  82  ; 
on  competition  between  rail- 
roads, 171 

Adams,  Charles  Francis,  on  the 
Granger  laws,  20  ;  on  strikes, 
78  ;  on  state  ownership  of  rail- 
roads, 149,  150  ;  on  the  railroad 
problem,  162  ;  on  the  Interstate 
Commerce  Act,  165  ;  on  consoli- 
dation of  railroads,  172  ;  on 
trusts,  242 

Adams,  Henry  C,  on  abolishing 
corporations,  121,  122 

Adams,  Prof.,  on  state  ownership 
of  railroads,  144,  145  ;  on  the 
dangers  to  the  state  from  rail- 
road consolidation,  181  ;  on  the 
political  power  of  corporations, 
i8g,  190 

Agreements  to  maintain  rates,  175- 
178 

Aid  to  railroads  by  municipalities, 
12-14,  9^-99 

Alexander,  E.  P.,  on  watered 
stock,  30 ;  on  discriminations, 
39  ;  on  long  and  short  haul,  43  ; 
on  pools,  53  ;  on  railroad  con- 
solidation, 180 


incorporation,      see 


Articles     of 
Charter 

AsHBY,  N,  B.,  on  state  ownership 
of  railroads,  153  ;  on  railroad 
commissions,  161 

Associations  to  maintain  rates,  1 75- 
178 

Atkinson,  Edward,  on  watered 
stock,  31  ;  on  railroad  consolida- 
tion, 179 

Australia,  policy  of,  as  to  railroads, 

143 
Austria,  policy  of,  as  to  railroads, 
142 

Banks,  liability  of  stockholders  in, 

99 
Bates,  W.  T.,  on  irrigation,   199, 

200 
Belgium,  policy  of,  as  to  railroads, 

143 
Bellamy,  on  state  socialism,  138 
Bemis,     E.  W.,  on  gas-works,  210 
Blackstone,   President,  advocacy 
of  state  ownership  of  railroads,  146 
Blanch ARD,  George  R.,  on  pools, 

56 
Bonds,    municipal,    given    to   rail- 
roads,   12-14,    96-99 ;    watered, 


255 


256 


INDEX. 


14,  24-33  !  of  a  company  should 

be   less  than   its  stock,  65,   66  ; 

restrictions  on  amount,  85 
Books    of    company,    examination 

of,  88 
Borrowing  power,   restrictions  on, 

85 
Bromley,    Isaac   U.,    on    railroad 

honesty,  175 
Bryce,  on  railroad  wars,    58  ;    on 

railroad     presidents,      190  ;     on 

trusts,  235 
Bubble  companies,  91-94 
Bucket  shops,  gambling  in,  67-73 
Buckle,  on  paternal  government, 

134,  135 
Business    for   which  incorporation 

may  be  had,  109 

Capital  of  corporations,  should  be 
represented  by  stock  rather  than 
bonds  65,  66  ;  stock,  limitations 
on,  108 

Carlisle,  Senator,  on  state  owner- 
ship of  railroads,  155 

Car  trust,  220 

Case  of  the  monopolies,  185 

Charters,  restrictions  on  grant  to 
new  railroads,  62,  63  ;  see  also 
Incorporation  ;  special  provisions 
in,  90;  special,  110-113;  also 
114-116 

Cities,  and  street  railroads,  201  ; 
as  owners  of  street  railroads,  etc., 
208-213  ;  government  and  func- 
tions of,  212,  113 

Clearing-house  of  railroa'ds,  58 

Coleman,  Tax  Commissioner,  on 
taxation  of  corporations,  103 

Combinations  and  trusts,  ch.  V. 


Commissioners,  giving  power  to, 
to  restrict  grant  of  charters,  62, 
63  ;  see  Railroads  and  Interstate 
Commerce  Commission  ;  rail- 
road, 160,  161 

Competition,  and  trusts,  ch.  V.  ; 
between  water  and  railroad  trans- 
portation, 40-44  ;  by  paralleling 
of  railroads,  60-63  \  between 
railroads,  170-172 

Connecticut,  special  charters  in, 
111-113 

Consolidation,  as  a  preventive  of 
railroad  wars,  59  ;  to  injury  of 
stockholders,  95  ;  of  railroads  as 
a  remedy  for  the  railroad  prob- 
lem, 166-181 

Constitutionality  of  reduction  of 
rates,  20,  21 

Constitutional  law,  Dartmouth 
College  case,  105-107 

Conte?7iporary   Review,    on    trusts, 

234 
CoOLEY,  Judge,  on  municipal  aid 
^to  railroads,  97  ;  on  Dartmouth 
College  case,  105,  106  ;  the  rail- 
road problem,    173-175  ;  trusts, 

234 
Co-operation  as  a  remedy,  122-130 
Corporations,  and  the  Republic, 
ch.  VI.  ;  and  political  corruption, 
ch.  VI.  ;  as  the  allies  of  plu- 
tocracy, ch.  VI.  ;  as  the  owners 
of  natural  monopolies,  ch.  IV.  ; 
differ  from  partnerships,  2,  3  ; 
advantages  over  partnerships,  2, 
3  ;  absorption  of  business  by,  4  ; 
benefits  of,  4  ;  moral  effects  of, 
5  ;  international  effects  of,  7  ; 
abuses  of,  7,  8  ;    various  contro- 


INDEX. 


257 


versies,  ch.  II.  ;  gambling  in 
stocks  of,  67-73  ;  frauds  on 
stockholders  and  creditors  of, 
80-96  ;  restrictions  on  mortgages 
and  debts,  85  ;  voting,  cumula- 
tive, 87  ;  removal  of  officers  of, 
87  ;  examination  of  books  of,  88  ; 
reports  of  officers,  88  ;  bubble, 
91-94  ;  powers  of  stockholders 
and  officers,  90,  91  ;  restrictions 
in  charter,  90  ;  liability  of  stock- 
holders, 99-101  ;  taxation  of, 
102-107  ;  incorporating  in  one 
State  and  doing  business  in 
another,  107-110;  special  char- 
ters, 110-113  ;  exclusive  privi- 
leges and  monopolies,  114-116; 
political  corruption  by,  1 16,  117  ; 
abolishing,  as  a  remedy,  121, 
122  ;  franchises  of  character,  183; 
see  also  Railroads  ;  as  the  owners 
of  natural  monopolies,  ch.  IV. 

Corruption,  and  the  corporation, 
ch.  VI.;  political,  by  corpora- 
tions, 116,  117 

Creditors  of  corporations,  frauds 
on,  80-96 

CuMMiNGS,  A.  B.,  on  Iowa  rail- 
roads, 28 

Cumulative  voting,  87 

Dartmouth  College  case,  105-107 
Debts,  restrictions  on  amount,  85 
Oepew,  Chauncey  M,,  on  restrict- 
ing the  grant  of  charters  to  rail- 
roads, 62  ;  on  trusts,  229 
Dillon,  Judge,  on  municipal  aid 

to  railroads,  97 
Directors,      frauds      by,      80-96 ; 
power   to    remove,   87  ;     reports 
17 


by,  88  ;  should  be  paid  f«>r  ser- 
vices, 95  ;  liability  to  creditors, 
loi  ;  qualitications  of,  109 

Discriminations  between  individu- 
als— rebates  and  secret  rates,  34- 
39  ;  towns — charging  more  for 
a  short  than  for  a  long  haul,  40- 
44  ;  articles — charging  what  the 
traffic  will  bear,  45-48 

Dividends,  limitation  of,  18  ;  stock, 
New  York  Central,  19  ;  stock, 
25,  26 

DoDD,  S.  C.  T.,  on  trusts,  233 

Duke  of  Marlborough  on  American 
railroads,  193 

Elections,  cumulative  voting,  87 

Electric  lights  are  natural  monopo- 
lies, ch.  IV. 

Ely,  Richard  T.,  on  discrimina- 
tions, 37  ;  on  bubble  companies, 
94 ;  on  co-operation,  124 ;  on 
state  ownership  of  railroads,  151  ; 
on  street  railroads,  207  ;  on 
natural  monof>olies,  211 

"  Encyclopaedia  of  Political  Sci- 
ence" on  discriminations,  35 

England,  special  charters  of  rail- 
roads required,  62  ;  foreclosures 
of  railroads  not  allowed,  65  ; 
frauds  in,  on  stockholders,  82 ; 
remedies  for  bubble  companies, 
92  ;  cost  of  land  to  railways,  117- 
119;  policy  of,  as  to  railroads, 
143,  144  ;  its  experiments  con- 
cerning railroads,  172,  173 

European  policy  as  to  railroads, 
140-155 

Evening  Post  on  watered  stock, 
32 


258 


INDEX. 


Examination  of  books  of  company, 

88 
Exchange,     stock,     gambling     on, 

67-73 

Exclusive  privileges,  to  corpora- 
tions, 114-116  ;  granted  by  char- 
ter, 186 

Exemptions  from  taxation,  102-107 

Ferries  are  natural  monopolies,  ch. 

IV. 
Foreclosures  of  railroads,  63-67 
France,  policy  of,  as  to  railroads, 

140,  141 

Franchise,  increase  of  value  with 
increase  of  population,  29  ;  to 
use  the  streets,  etc.,  173  ;  defini- 
tion of,  183  ;  to  act  as  a  corpo- 
ration, 183 

Frauds  on  stockholders  and  cor- 
porate creditors,  80-96 

Free  passes,  48-50 

Gambling  in  stocks,  67-73 
Gas-works  are  natural  monopolies, 

ch.  IV. 
George,  Henry,  on  municipal  aid 

to  railroads,  98 
Germany  and  state  socialism,  135- 

137  ;  policy   of,  as  to  railroads, 

141,  142 

Government,  and  the  corporations, 

ch.    VI.  ;     paternal,     130-140  ; 

ownership  of  railroads,  140-155  ; 

as  the  lessor  of  railroads,  155,  156 
Granger  laws,  20,  21  ;   cases,  159, 

160 
Grants  of  land  to  railroads,  97 

Hadley,  a.  T.,  on  charging  what 
the    traffic    will    bear,    46  ;    on 


pools,  52  ;  arguments  on  state 
ownership  of  railroads,  147 

Hale,  Edward  Everett,  on  state 
ownership  of  railroads,  150 

Haul,  long  and  short,  40-44 

Hepburn  Investigating  Commit- 
tee, 35,  39  ;  effects  of,  160 

Hewitt,  Abram  S.,  on  co-opera- 
tion, 126 

Hill,  Sir  R.,  arguments  on  state 
ownership  of  railroads,  148,  149 

Hitchcock,  Henry,  on  debts  of 
corporations,  85-86  ;  on  reports 
of  officers,  89 

Holland,  policy  of,  as  to  railroads, 

143 

Hubbard,  N.  M.,  on  abolishing 
corporations,  121,  122 

Hudson,  on  discriminations,  39  ; 
remedy  of  separating  railroad 
ownership  from  the  transporta- 
tion thereon,  12 1 

Hungary,  policy  of,  as  to  railroads, 

143 
Huntington,  C.  P.,  on   railroad 

consolidation,  179 

Illinois,  Central  R.  R.  Co.  plan  of 
co-operation,  125  ;  and  the  state 
of  Illinois,  202 

Incorporation,  articles  of,  see 
Charter  ;  place  of,  by  reason  of 
liability  of  stockholders,  lOO, 
loi  ;  in  one  State  and  doing 
business  in  another,  107-110 ; 
should  be  allowed  for  all  pur- 
poses, 109 

Inspection  of  corporate  books,  88 

Insurance,  railroad,  as  a  remedy, 
by  the  state,  128-130  ;  I35-I37 


INDEX. 


259 


Interstate  Commerce  Act,  161, 162  ; 
should  perhaps  prohibit  railroad 
wars,  59  ;  railroad  objections  to 
it,  162,  164  ;  effect  on  towns, 
166 

Interstate  Commerce  Commission, 
reduction  of  rates,  21-23  ; 
watered  stock,  25  ;  competition 
between  rail  and  water.  43  ;  on 
charging  what  the  traffic  will 
bear,  4S  ;  free  passes,  51  ;  on 
pools,  55  ;  railroad  wars,  57  ; 
railroad  insurance,  130  ;  its 
cause,  160,  i6i  ;  its  difficulties, 
162-164  ;  relative  to  repeal  of 
anti-pool  clause,  166  ;  relative  to 
short  and  long  haul.  166 ;  on 
railroad  trusts,  168,  169 

Irrigation  reservoirs,  198-200  ;  are 
natural  monopolies,  ch.  IV. 

Italy,  policy  of,  as  to  railroads, 
142 

James,  E.  J.,  on  frauds  of  direc- 
tors, 83 

Jeans,  on  discriminations,  40  ;  on 
charging  what  the  traffic  will 
bear,  47  ;  on  pools,  53  ;  on  cor- 
rupt cost  of  right  of  way  of 
English  railways,  117,  118 

Labor,  wages  of,  76 

Land,  grants  to  railroads,  97  ;  cor- 
rupt cost  of,  to  English  railways, 
1 1 7-1 19 

Larrabee,  Ex-Governor,  on  dis- 
criminations, 37 

Lease  of  street  railroads  to  injury 
of  stockholders,  95  ;  by  cities, 
207 


Leasing  of  railroads  by  the  state, 

155,  156 

Leese,  Attorney  -  General,  on 
watered  stock,  33 

Legislature,  power  to  reduce  rates, 
20 

Liability,  of  stockholders  to  credi- 
tors, 99-101  ;  of  directors  to 
creditors,  loi 

Limitation  of  dividends,  18  ;  of 
capital  stock,  108 

Long  and  short  haul,  40-44 

Michigan,  State  ownership  of  rail- 
roads in,  145 

Mill,  John  Stuart,  on  co-operation, 
122;  on  paternal  government,  132 

Miller,  Mr.  Justice,  on  Dart- 
mouth College  case,  106 

Monopolies,  and  trusts,  ch.  V.  ; 
granted  to  corporations,  114-116; 
meaning  of  the  word  monopoly, 
114,  115 

Monopoly,  a  railroad  is  a,  17,  18  ; 
natural,  ch.  IV.  ;  definition  and 
nature  of,  182-188 

Mortgages,  restrictions  on  amount, 

85 

Municipal,  aid  to  railroads,  96-99  ; 
bonds,  given  to  railroads,  12-14, 
96-99 

Municipalities,  and  street  railroads, 
201  ;  as  owners  of  street  rail- 
roads, 208-213 

Myers,  Controller,  on  taxation  of 
natural  monopolies,  206 

Natural  monopoly,  ch.  IV. 
New     Jersey     water-works     com- 
panies, 197 


26o 


INDEX. 


New  Orleans  street  railroads,  207 

New  River  Water-works  Com- 
pany, 196 

New  York  Recoi'd  and  Guide,  on 
strikes,  76,  79  ;  on  bubble  com- 
panies, 92  ;  on  paternal  govern- 
ment in  Europe,  138  ;  on  owner- 
ship of  natural  monopolies,  209 

New  York  Times  on  trusts,  230 

Officers,   frauds  by,  80-96  ;  power 

to  remove,  87  ;   reports  by,  88  ; 

should  be  paid  for  services,  95  ; 

liability  to  creditors,   loi 
Ownership  of  railroads  by  the  state, 

140-155 

Paralleling^  of  railroads,  60-63 

Partnerships  have  been  displaced 
by  corporations,  2,  3 

Passes,  free,  48-50 

Paternal  government,  130-140 

Philadelphia  &  Reading  R.R.  Co. 
co-operation,  126 

Place,  of  incorporation,  100,  loi, 
107-110;  of  stockholders' meet- 
ing, 109 

Plutocracy  and  the  corporations, 
ch.  VI. 

Political  corruption  by  corpora- 
tions, 116,  117 

Politics  and  the  corporations,  ch .  VI . 

Pools,  51-56  ;  as  preventives  of 
railroad  wars,  58  ;  in  the  shape 
of  "gentlemen's  agreements" 
and    "presidents'    conferences," 

175-179 
Poor,  on  watered  stock,  25 
Powers  of  stockholders  and  direc- 
tors, 90,  91 


Privileges,    exclusive,    granted    by 
charter,    186  ;     to    corporations, 
114-116 
Profit-sharing  as  a  remedy,  122-130 
Promoters,  frauds  by,  91-94 
Property  in  payment  of  stock,  91- 

94  ;  see  also  Watered  Stock 
Prospectuses,  fraudulent,  91-94 
Prussia,  policy  of,  as  to  railroads, 

141,  142 
Public  opinion,  its  effect  on  corpo- 
rations, 9 
Purposes  for  which    incorporation 
allowed,  109 

Qualifications  of  directors,  109 

Railroad  Commissioners,  160,  161 
Railroad  Gazette,  19  ;  on  watered 
stock,  32  ;  on  charging  what  the 
traffic  will  bear,  46  ;  on  free 
passes,  50 ;  on  pools,  53  ;  on 
railroad  clearing  house,  58  ;  on 
desirability  of  railroad  capital 
being  represented  by  stock  rather 
than  bonds,  65  ;  on  co-operation, 
127  ;  on  railroad  insurance,  128- 
130  ;  on  leasing  of  railroads  by 
the  state,  156,  157  ;  on  railroad 
trusts,  169  ;  on  trusts  of  stock, 
220 
Railroad   trust   is  not    feasible  or 

desirable,  168,  169 
Railroad  voting  trust,  220-222 
Railroads,  are  natural  monopolies, 
ch.  IV.  ;  as  an  intellectual  force, 
5  ;  moral  effect  of,  6  ;  abuses  of, 
8;  reduction  of  rates,  11-24; 
are  naturally  a  monopoly,  17-18  ; 
watered  stock  and  bonds,  24-33  ; 


INDEX. 


261 


discriminations  between  indi- 
viduals, f.  r-.,  rebates  and  secret 
rates,  34-39  ;  discriminations  be- 
tween towns,  charj^ing  more  for 
a  short  than  for  a  long  haul,  40- 
44  ;  number  of  stations  in 
United  States,  41  ;  discrimina- 
tions between  articles — charging 
what  the  traffic  will  bear,  45-48  ; 
free  passes,  4S-50 ;  pools,  51- 
56  ;  wars,  56-59  ;  clearing  house, 
58  ;  consolidation  as  a  preven- 
tive of  wars,  59  ;  paralleling  of 
lines,  60-63  ;  restrictions  on 
grant  of  charters  to,  62,  63  ;  fore- 
closures and  reorganizations,  63- 
'67  ;  bonds  should  be  less  than 
the  stock,  65-66  ;  consolidations, 
etc.  to  injury  of  stockholders,  ' 
95  ;  municipal  aid  to,  96-99  ;  1 
land  grants  to.  97  ;  remedies  for 
railroad  problems,  ch.  III.  :  co-  ' 
operation,  122-128 — insurance,  ; 
1 28- 1 30 — state  socialism,  130- 
140 — state  ownership  of  rail-  . 
roads  140-155 — leasing  by  the 
state.  155,  156 — regulation  by 
the  state,  157-166 — consolida- 
tions, 166-18 1  ;  effects  of  com- 
petition, 170-172;  see  also  Cor- 
p)orations 

Rates  of  railroads,  reductions.  11-  \ 
24 

Rebates,  34-39 

Receivers,      reorganizations,     etc., 
63-67 

Regulation  of  railroads  by  the  state. 
157-166 

Remedies  for  the  railroad  problem, 
ch. III. 


Reorganization  of  railroads,  63-67 

Reports  of  officers,  88 

Republican  institutions  ami  cor- 
porations, ch.  \'I. 

Reservoirs  for  irrigation,  198-200 

Restrictions  on  grant  of  charters 
to  railroads,  62-63 

Right  of  way,  corrupt  cost  of,  to 
English  railways,  1 1 7-1 19 

Roberts,  George  H.,  on  watered 
stock,  27  ;  on  the  Interstate 
Commerce  Act,  164 

Sherman,  John,  on  trusts,  240 

Short  and  long  haul,  40-44 

Socialism  as  a  remedy,  130-140 

South  Sea  Bubble,  67 

Special  charters,  110-113,  also 
114-116 

Spencer,  Herbert,  on  co-opera- 
tion, 127  ;  on  state  ownership  of 
railroads,  152 

Standard  Oil  Company,  rebates  to, 

36 

State,  and  the  corporations,  ch. 
VI.  ;  socialism  as  a  remedy,  130- 
140;  ownership  of  railroads,  140- 
155  ;  as  the  lessor  of  railroads. 
155.  156;  regulation  of  rail- 
roads,   157-166 

Stations,  number  of,  in  United 
States,  41 

Statutes,  reducing  rates.  20,  21 

Stickney,  a.  B,.  on  receiverships 
for  railroads  which  violate  the 
Interstate  Commerce  .Act.  166, 
167  ;  on  competition  among 
railroads,  170 

Stock,  dividends.  25.  26  .  watered, 
14.  24-33  ;    New  York    Central, 


262 


INDEX. 


19  ;  of  railroads,  owned  by  non- 
residents, 16,  17  ;  should  exceed 
bonds  of  a  company,  65,  66  ; 
gambling,  67-73  ;  issued  for 
property,  gi-94;  see  also  Watered 
Stock 

Stockholders,  powers  of,  80-96  ; 
frauds  on,  80-96  ;  powers  of,  go, 
gi  ;  and  consolidations,  etc.,  95  ; 
liability  to  creditors,  gg-ioi  ; 
meeting-place  of,  log 

Street  railroads,  as  monopolies, 
ig4  ;  and  cities,  201  ;  taxation 
of,  201-206  ;  sale  of,  by  city  for 
limited  number  of  years,  207  ; 
owned  by  cities,  208-213  ;  are 
natural   monopolies,  ch.  IV.; 

Strikes,  73-80 

SwANN  on  watered  stock,  31 

Tacitus  on  the  gambling  of  the 
Germanic  races,  67 

Taxation,  of  corporations,  etc. 
102,  107  ;  of  natural  monopolies, 
201-206  ;  of  street  railroads, 
etc.,  201-206 

Telephones  are  natural  monopo- 
lies, ch.  IV. 

Telegraphs  are  natural  monopolies, 
ch.  IV. 

Thompson,  S.  D.,  on  trusts,  23g 

Traffic  contracts,  1 75-1 79 

Trusts,  ch.  v.;  causes  of,  214-217  ; 
definition  and  nature  of,  217- 
224  ;  legality,  224-225  ;  ten- 
dency towards,  225-227  ;  as  a 
means  of  doing  business,  227- 
228  ;    as  monopolies,   22g-235  ; 


transformation  into  corporations, 
242  ;  railroad,  not  feasible  or 
desirable,  168,  169  ;  voting,  220- 
222 

Underground    conduits    for   wires 
are  natural  monopolies,  194 

Voting,  cumulative,  87  ;  trust,  220- 
222 

Wages  of  labor,  76 

Walker  on  railroad  competition, 
178 

Warner,  Amos  G.,  on  ownership 
of  stock  by  non-residents,  16  ; 
on  strikes,  79  ;  on  frauds  on 
stockholders,  84  ;  on  borrowing 
powers,  86  ;  on  reports  of  offi- 
cers, 89  ;  on  bubble  companies, 
92  ;  on  liability  of  directors. 
10 1  ;  on  ownership  of  natural 
monopolies,  2og 

Wars  of  railroads,  56-5g 

Water  competition  with  railroads, 
40-44 

Watered  stock  and  bonds,  14,  24- 
33  ;  definitions,  24  ;  methods  of 
issuing,  25-26  ;  injurious  effects 
of,  26-2g  ;  defences  for,  30-31  ; 
remedies  for,  32 

W'ater-works  are  natural  monopo- 
lies, ch.  IV. ;  as  monopolies,  ig5  ; 
New  River  Company,  ig6 

Western  Union  Telegraph  Com- 
pany's stock  dividend,  26 

Wharves  are  natural  monopolies, 
ch.  IV. 


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